NACHA Takes a Page From PayPal’s Playbook

Electronic payments association NACHA (Herndon, Va.) announced it plans to test a program that allows banks to provide customers with a more private online experience. The as yet unnamed initiative will enlist the help of banks to act as intermediaries for consumers' online transactions: online funds transfers, bill payments and purchases.

According to Michael Herd, a NACHA spokesman, the premise of the project is to open new markets up to banks in the Internet space. "Confidence in online transactions exists with many consumers already. But there is an additional market segment where people are not entirely comfortable with all kinds of online transactions. This is a potential new market for banks," he says. This is also a means of better relationship-building between banks and their customers as well since it emphasizes the bank as the trusted entity, he notes.

The process sends transactions on a round-trip. When consumers at an online retailer, for example, click on the "buy" button, they are redirected via a secure network (courtesy of Sydney-based eWise Systems) to their banks' Web site where they are asked to log in. Logging in will presumably be with the exact same method the banks ask their customers to log in for banking services, relates Herd. The consumer confirms the transaction details at the bank site and then authorizes payment.

In essence, the consumer's account information is never shared with the merchant, eliminating the problems that crop up when third parties improperly store consumers' account data. This is somewhat like PayPal's operating model. However, as Herd quickly points out, "With [the NACHA method], the transaction and account information stays between the customer and the bank."

The pilot follows an initial proof-of-concept phase where a small number of participants tested the underlying technology. In the new phase, banks will be processing actual financial activities in real time. Herd says NACHA hopes to enlist at least five banks and 10 billers, merchants or government agencies in the pilot. Participants would then ask their customers if they too would like to take part in the program. Right now, NACHA is just getting started in gathering participants. "We announced the plan on Wednesday and already we've gotten a number of good inquiries from banks big and small," says Herd.

Participants do not have to pay NACHA a fee to join the pilot. However, there will need to be some dollars spent in terms of devoting personnel and implementing the system, explains Herd. He adds, however, "The proof of concept folks said implementation of the system is not a barrier to using this technology—certainly not to the degree that it would prevent anyone from doing this. We're taking advantage of the [authentication] technology banks already have. And if you look at this from the perspective of the new FFIEC [two-factor] authentication guidelines, a robust authentication system makes this process stronger." Therefore, the NACHA initiative helps put a positive spin on the new regulation, he says.