Intuit Inc.'s new alternative payment system does what few rivals dare to do: undercut the prices of market leader PayPal for most transactions.
Charging a flat fee of 50 cents a transaction, the Intuit PaymentNetwork is designed to woo small businesses concerned more with cost than with features, observers say.
The trade-off for a low fee is fewer options: payments must be initiated by e-mail and can only be made by bank transfer — credit cards are not an option for Intuit's network.
Indeed, analysts said, the sweet spot for the fledgling service could be in the business-to-business marketplace.
Though the system resembles PayPal's person-to-person roots, Intuit has aimed it squarely at small-business owners. The "personal account" option is designed only to send money, and carries no charge, whereas the "business account" option is designed for companies to receive funds for a fee.
"Unlike its competitors or other payment methods, there are no setup costs, monthly fees or confusing statements and it simply costs you 50 cents each time you get paid," Chetan Sukthanker, an Intuit product manager, said in a post to the Mountain View, Calif., company's small-business blog last week.
Most rival payment systems, such as those offered by Amazon.com Inc. and Google Inc., have fee structures that mimic that of PayPal, a unit of the online auctioneer eBay Inc. PayPal charges merchants 30 cents a transaction, plus a percentage of the transaction size. The percentage ranges from 1.9% to 2.9% based on a merchant's monthly volume.
Amazon.com has a special rate for transactions of under $10, but PayPal and Google do not. For merchants with low monthly sales, it would be cheaper to use Intuit's PaymentNetwork rather than PayPal or Google for any transactions over $7. According to eBay's second-quarter earnings report, the average PayPal transaction is $64.35.
A PayPal representative did not return a call requesting comment.
Observers say that Intuit's pricing may stem from its low costs. By using the automated clearing house system exclusively, the network would not need to absorb the costs of pricier payment alternatives into its fee structure.
Intuit has pushed harder into financial services in recent years. Though it has long had bank relationships for products such as its Quicken and QuickBooks financial management software, Intuit entered a new realm of financial services in 2007 with its $1.33 billion purchase of the online banking vendor Digital Insight Corp.
More recently Intuit has worked to keep up with or surpass trends in online banking and payments. Its Quicken Online service, launched last year, competes with the likes of the nonbank personal financial management providers Mint Software Inc., Wesabe Inc. and Geezeo Inc.
This year Intuit rolled out a card-acceptance service called GoPayment that runs on mobile handsets such as Apple Inc.'s iPhone and Research in Motion Ltd.'s BlackBerry. It also lets merchants accept payments through its QuickBooks desktop software.
Bruce Cundiff, a director of payments research and consulting for Javelin Strategy and Research in Pleasanton, Calif., said PaymentNetwork targets mom-and-pop shops, while PayPal has focused its attention on helping larger merchants integrate its technology into their own Web sites.
PaymentNetwork is like PayPal, "but it's not person-to-person … they are more ardently going after the business-to-business transactions and potentially filling that niche that PayPal has" not focused on because the latter has "very much been focused on retail transactions," Cundiff said.
Intuit's service "is much more focused on supplier transactions, kind of one step away from the retail environment," Cundiff said. It is "trying to be maybe a B-to-B version of PayPal."
For business-to-business payments, there is not as much need for a recognizable consumer payment brand, and much more familiarity between the sender and the recipient of the payment, Cundiff said. "The brand equity that they're trying to leverage is Quicken, QuickBooks, etc. — where Intuit is strong."
Actually, Cundiff said, this audience is likely to ignore the fact that other alternative payment systems are less expensive below $10 or $7, because so few B-to-B transactions fall in that range. The price will draw business owners to the service, he said, but it is more important that their peers are also willing to make and receive payments this way.
"Price is a potential builder of critical mass, but if you don't have transactions, you don't have a network," Cundiff said. "That's the bottom line."
Aaron McPherson, a research manager for payments at IDC Financial Insights in Framingham, Mass., said that although Intuit's service does compete with PayPal in the small-business market, it is not designed to handle any other types of payments.
"PayPal has a peer-to-peer option, and this one doesn't," he said. To sign up to receive money, a user has to provide a Social Security number, which McPherson said indicates that Intuit is doing some due diligence — a credit check at least — to make sure anyone who uses its system to receive money is identifiable and accountable.
The requirements are less stringent for those sending money because there is less risk, McPherson said. "The burden on the consumer to authenticate is not as great because it's a push system. There's no pulling money out of people's accounts."
Andrew Schmidt, a research director at TowerGroup Inc. of Needham, Mass., an independent research firm owned by MasterCard Inc., said many merchants are likely to be willing to overlook the service's shortcomings in order to get a lower price, which is an advantage to Intuit until another payment system feels threatened.
"It makes the offering very vulnerable to a very quick and easy change on the PayPal side — which is to match the pricing," Schmidt said. If the fees were the same, Intuit's offering could lose out to the more robust service PayPal offers, he said.
PaymentNetwork payments are automated clearing house payments, which carries some advantages, such as low cost, but also some disadvantages, Schmidt said.
"It is a sustainable price," he said, but relying on ACH means it can take several days for a payment to move from the buyer to the seller.
"That is a drag on the value of the offering for the user," he said.
Intuit could address these flaws by adding a stored-value feature, something PayPal has long done, Schmidt said.
Another challenge Intuit faces is branding. Though there are many devotees of its Quicken and QuickBooks products, the company is not thought of as a payment brand, Schmidt said.
"Adoption could be a challenge, because it's a new payment type and people are more familiar with the PayPals and the Googles and the Amazons," he said.
Despite ACH's inherent limitations and the low awareness of a start-up payment service (Intuit has so far done little to advertise it, apart from a blog post), PaymentNetwork could gain a following, Schmidt said. "It certainly would be attractive to businesses that are selling high-dollar items."
