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Last year, the e-mail-payment market was pioneered by PayPal (www.paypal.com), a Silicon Valley startup that gave Netizens the ability to send money to anyone on the Net via e-mail. The breakthrough technology has made PayPal one of the fastest growing Net-only financial-services companies. Though still struggling to earn a profit and recently forced to give up on online banking, PayPal is still the giant in its niche. It claims to have 4.5 million customer accounts, to handle 25% of all transactions on eBay, and to funnel $2 billion in payments, annualized, through its servers. AOL PARTNERSHIP. With PayPal on its way to becoming the dominant alternative to credit cards for online payments, who can blame the 800-pound gorilla of banking, Citigroup, for wanting a piece of PayPal's market? On Oct. 31, Citi launched its own e-mail-payment service, called c2it (www.c2it.com). Citi's most visible partner is America Online, which offers the service under the name AOL QuickCash. It's nearly a clone of PayPal. Using either a credit card or a bank account, anyone can send money online via e-mail. But PayPal doesn't need to sweat the arrival of Citigroup on its turf -- yet. C2it is unlikely to have the kind of hypergrowth PayPal experienced for one reason: Citi is charging a $2 fee for each transaction (following a three-month promotion in which fees are waived). PayPal's product is free for consumers. Though PayPal charges businesses a 1.9% transaction fee, that's much lower than the 3%-4% charged by credit-card companies for accepting online payments. Citigroup "is charging too much," says Gartner Group consultant Avivah Litan, who knows more about the online-payments market than just about anyone else. While $2 may not seem like much, such fees have been the bane of others trying to make a run at the online-payments market. Bank One's eMoneyMail, for example, has gone almost nowhere, in part because it charges $1 per transaction, Litan says. SNAIL-MAIL PAPERWORK. I tried c2it. It works, though not as quickly as I would have hoped. Sending money via credit card is a snap. But receiving it is another matter. You can have the money credited to a credit card easily enough. But if you want it sent to a bank account, Citi requires paperwork sent via snail mail, and that's not convenient. C2it also has other features unlikely to appeal to consumers who compare the product with PayPal. For one, Citi offers no insurance against fraud, while PayPal does -- though Citi's accounts are FDIC-insured. So if someone steals your bank account number and starts transferring money, good luck. Consumers have more fraud protection for online transactions if they use a credit card. If their credit card is used by a thief to fund fraudulent c2it transactions, consumers are protected by law for all but the first $50. Citi lets new customers opt out of receiving marketing materials from third parties. But it forces customers to accept Citi marketing literature through the mail unless they write a letter requesting to be taken off the mailing list. This is the kind of marketing trap Netizens despise. I expect my mailbox will soon be flooded with countless unwanted Citi promotions. There should be a simple opt-out check box for all marketing materials. ONLY ONE PIECE. In the short run, PayPal isn't in danger. The long run is another matter. Citigroup views C2it as only one piece of a very large online puzzle, according to c2it Chief Operating Officer Antony Jenkins. The product will gradually be expanded to include a wide variety of AOL merchants, online bill payment, and mobile commerce, he says. Citi will also expand c2it to cover international payments. And with its vast reach abroad, it will became a no-brainer alternative to the costly wire transfers used by thousands of Citi clients today. Citi hopes to sign up many of its business customers to accept c2it payments, eventually allowing consumers to make purchases in stores via wireless phone. PayPal is pursuing similar strategies. It has also added features to keep it ahead of c2it, including a service allowing businesses to sweep payments into a high-interest money-market account at the close of each business day. And coming soon for consumers: an ATM card. Here's how I think it might play out. PayPal has a good shot at remaining the dominant online-payments company for consumers and small businesses. Citi will become a leader in international payments. The wireless world is up for grabs. Let me know what you think by sending an e-mail to the address below. Smith covers a wide variety of topics, including personal finance issues, from Business Week's Boston bureau. Have a question or a comment? Let him know at geoff_smith@ebiz.businessweek.com. |
