E-credit card: New debt trap?

Alternate payment systems for the Web have never made much headway, notwithstanding the best efforts of now-defunct pioneers such as DigiCash.

The problem? Credit cards were just too easy to use. So it makes sense that the newest alternate payment systems for the Web are actually - drum roll, please - credit cards.

Both Citibank and American Express have launched cards that are supposed to be especially well-tailored to electronic commerce. Citibank's ClickCredit can be used only online. Citibank's 40 million existing credit card customers can apply for, and receive, ClickCredit online in just a few minutes.

Buyers new to the bank need to wait for confirmation of their account to arrive in the mail, which takes roughly a week. Users receive a plastic card sans magnetic stripe and embossing, which is designed to be a reminder of the account numbers.

American Express's new card, simply called Blue, comes with a smart chip embedded in it. AmEx officials say Blue can be used anywhere that AmEx's flagship card is accepted, but the smart chip will provide an extra layer of security for those wishing to purchase online.

Blue cardholders will be able to get a smart-card reader for free from AmEx until early next year, after which time the readers will cost $25 each.

But why bother? Credit cards are already the de facto currency of the Internet, and there are plenty of start-ups with huge marketing budgets pushing e-commerce into the mainstream as fast as they can.

Will marketing muscle from Citibank and AmEx really make a difference? "Blue and ClickCredit are exercises in branding," says Theodore Iacobuzio, an analyst at TowerGroup, a high-tech financial services research firm. "Neither of the schemes is an attempt to sell more credit."

Instead, he says Citibank and AmEx are trying to segregate their heavy Internet users to see how they behave. "The big credit-card issuers have world-class data mining and statistical and analytical back offices that do nothing but sift through transaction information," Iacobuzio says. Data from ClickCredit or Blue purchases will make valuable contributions to those databases, he says. ClickCredit comes loaded with free features, such as buyer assurance and price guarantees.

Anthony Jenkins, a vice president at Citibank, says ClickCredit will pay off in terms of customer loyalty and "a lot of learning" for the bank. And he thinks ClickCredit will prove a better bulwark against electronic wallets than a traditional card could. "As electronic commerce grows, we'll be able to get a larger share of that," Jenkins says.

Both Citibank and AmEx have good reason to try and promote e-commerce: Credit-card issuers make more money from online purchases. In the physical world, bank cards charge merchants 2 percent to 6 percent of the price of all goods purchased with plastic. The issuing bank - Citibank, in the case of ClickCredit - gets about half of that fee. The merchant's bank and the credit card association split the other half. AmEx charges are at least half a percentage point higher.

But merchants pay fees at least half a percentage point higher for transactions that come in through the Net, Iacobuzio says. The credit card associations and issuers maintain that fraud is higher on the Net, so they have to absorb more losses than they do in the physical world.

Start-up eCharge is taking aim at these fees. The Seattle-based company is embarking on a dicey strategy: building out its own payment network in much the same way Discover built out a private network in the 1980s. ECharge has teamed with a bank - it won't say which one - to offer a line of virtual credit that will act like a credit card. For merchants, eCharge says its fees will be up to a full percentage point lower than those of Visa and MasterCard. For some online merchants, says eCharge co-founder George Fleming, that drop in fees "can push them from unprofitability to profitability very quickly."

ECharge will use digital certificates to identify both buyer and merchant. It should also cut down on fraud. ECharge will also allow cardholders to set up subaccounts for employees or for children, and claims that its system will be economic for micropayments of just a few cents.