First Data Corp. announced a new program that allows consumers with the company's STAR debit cards to register with online payment provider PayPal Inc. through online banking Web sites. First Data believes this will provide enhanced security for e-commerce payments as well as bolster revenue for participating financial institutions.
For registered financial institutions, the service will provide a direct link from their online banking sites to the PayPal network.
Customers who register for PayPal this way will be authenticated by their banking site and then by PayPal, and with every PayPal purchase they make, the payment portal will be branded both with the appropriate bank name as well as the PayPal name.
"The consumer is authenticated via the financial institution's Internet banking site, and then the customer completes his enrollment at the PayPal site, so the premise is a consumer that is known and already authenticated right off the bat," said Julie Saville, Vice President of the First Data STAR Network. "Once the consumer is enrolled, from that point onward, he or she is able to shop on the Internet and would select PayPal.
"Once they select PayPal they are presented with a pop-up screen ... and will also see their financial institution brand, which is a key feature of the program."
Saville added that, by connecting PayPal directly to customer checking accounts, the program allows debit payment settlement to happen in real time. "All transactions that result in funding to the PayPal wallet will end up going through STAR in real time, so that the financial institution authorizes it in real time as well," she said.
By contrast, "a lot of the PayPal transactions today are routed through the [automated clearing house] network, and so financial institutions do not receive these in real time," she said.
"For consumers, it allows them to reconcile their bank account right away, and know what funds are available. ... We already have real-time infrastructure built with the PIN debit networks in this country, so let's use it."
Richard Brierley-Jones, Executive Vice President at e-commerce solutions provider eWise Systems USA, said First Data's new service caters to consumers who, in a time of economic strain, are increasingly relying on debit rather than credit cards.
"Debit cards and credit cards in particular were never designed to be used in the online world; they've been made to work that way in some way, shape or form," he said. "I think what this is ultimately trying to do is allow people to access their checking accounts while maintaining the secure environment.
"More people want to use their debit card and checking account as a primary way of transacting in the online world, and this allows them to do that."
Brierly-Jones said the program could hurt issuing banks by steering consumers away from credit and toward debit cards, which carry lower interchange rates. "What PayPal is trying to do is reduce their costs, and the way they can do it is use other forms of funding to increase their margins," he said. "A debit card has lower interchange fees than a credit card ... but the banks are potentially losing out on interchange revenue."
For financial institutions registered with First Data's new service, however, the benefits are numerous, Selville said.
"It provides a value-added service to their best customers, which are their Internet banking customers," she said. "It reinforces their brand on the Internet for every purchase their customers make, and it increases their revenue opportunity because now the transactions flow through to the financial institutions as a revenue generating transaction instead of as an ACH expense."
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