Don Park: A market-based credit card system

Don Park discusses an idea he’s had for a new, market-based credit card system where financial institutions would bid for each transaction or, more likely, each cardholder.

At the market, financial institutions bid for the transaction by matching the transaction’s risk profile (sum of cardholder, card issuer, and merchant risk profile) with the institution’s target risk profile. Some transactions are not live, meaning that they are old transactions returned to the market because transaction risk profile no longer meets original transaction owner’s risk profile requirements (i.e. cardholder lost his job one month after he purchased a car).

With today’s technology, building multi-faceted risk profile in real time is not likely to be scalable. More realistic implementation will deal with cardholders instead of transactions; that is financial institutions bids and asks for the right to handle a cardholder’s transactions.

A single institution system that’s somewhat similar to Don’s idea is Bill Me Later.

Obviously, a single institution does not a market make — but the idea of looking at each transaction in real-time and deciding whether to advance credit to the consumer is similar to the risk management approach that motivates Don’s proposal.

With Bill Me Later, in addition to the normal checkout information, the consumer provides her birth date as well — which is used in conjunction with the address information provided to access online credit information to allow Bill Me Later to make a credit decision on the transaction. An FAQ on Bill Me Later focuses on the consumer questions about the system. Because there’s no credit card information exchanged as part of the transaction, one of the benefits claimed is better security for both consumers and merchants — the consumer’s credit card information can’t be stolen because it doesn’t exist.

Paymentech has a brochure on the Bill Me Later system which is focused on the benefits to merchants from adopting the system. In addition to enabling consumers without credit cards to purchase online, merchants also benefit from lower costs as Bill Me Later’s merchant discount fee is lower than that of traditional credit cards.

Bill Me Later is a product of I4 Commerce. Led by CEO Gary Marino, I4 Commerce has First Data Corporation and Chase Paymentech as investors/partners along with Crosspoint Venture Capital. An August news report said that 20 major online retailers will begin rolling out the Bill Me Later payment option in the fourth quarter of this year.

Bill Me Later is the first serious threat to the near monopoly that Visa and MasterCard (and their credit card issuing bank members) have had with respect to online purchases. Each transaction that moves down the Bill Me Later path — and not the bankcard path — results in no fees being paid to the card associations and, obviously, the loss of the credit relationship with the consumer — which is the primary source of most of the revenue and earnings of credit card issuers.

Of course, online purchases today represent only a few percent of consumer purchases so the immediate threat is small. On the other hand, most of the online purchase activity is concentrated into a relative handful of merchants — so by signing up the top online merchants Bill Me Later can rapidly enter the market.