Building the Transpoint for small and microbusinesses

CheckSpace starts with a fast loading, relatively uncluttered interface. Within 30 seconds, a new user can get a good understanding of what CheckSpace does, and where to get more information, or signup.

The Company

CheckSpace Inc.
43 employees
13427 NE 16th Street
Bellevue, WA 98005
(425) 643-9905
www.checkspace.com

Seattle-based CheckSpace was founded in March 2000 by two Microsoft alumni, one with experience developing Internet Explorer and the other involved in the TransPoint ebilling and payment company.¹ CheckSpace’s 43-employees are attempting to provide the best epayment solution for small businesses. The company is currently offering the service directly, targeting individuals and businesses with fewer than 100 employees. But it is actively soliciting top-250 banks for co-branded or “powered by CheckSpace” offerings.

The CheckSpace ePayments Platform is the first payments solution built with the Microsoft .NET Enterprise Servers. The company claims that with this server, XML (Extensible Markup Language), and SOAP (Simple Object Access Protocol), it can complete complex projects in under 30 days. Its first banking installation was at CompuBank in mid-March. 

¹Transpoint, a joint venture of Microsoft and First Data, was sold to Checkfree in 2000 in a stock transaction valued at $1 billion.

Management Team: CheckSpace employees have experience in designing commercial payment and transaction systems for the U.S. and international payments working at Microsoft, First Data, and Bank of America. Both co-founder, Bassam Saliba, and Director of Biz Development, Dan German, where involved in Transpoint, the Microsoft/First Data ebilling joint venture sold to Checkfree in 2000.

Funding: CheckSpace secured $11 million in a first round of funding in October 2000 from the following venture capitalists and angels.

Source: CheckSpace, 4/01

Products and Services

CheckSpace provides three types of ebilling and payment processing (EBPP) services:

·         sending payments to individuals and businesses via ACH and email (like PayPal)

·         paying bills with remotely printed and mailed paper checks (like Checkfree)

·         sending email invoices that recipients can pay via ACH or credit card (like PayPal)

                                                                                                                                                          

How it Works: CheckSpace’s epayment services are designed to be integrated into small business Web sites and/or packaged accounting software applications. Like PayPal, payments can be made electronically between any two parties with email addresses and bank accounts. Each party to the transaction must register with CheckSpace, although a bank distributor could “pre-register” its customers to make the initial signup transparent. Unlike PayPal, CheckSpace never takes ownership of the funds being transferred. All transactions are processed through users’ existing bank accounts.

Registration

1.      The user registers with CheckSpace and provides name, email address, and zip code. CheckSpace replies with an email verification to the user, accompanied by a welcome message with instructions on how to increase spending limits and another offering $10 in transaction credits for each referral that signs on.

2.      The user clicks the hyperlink in the email, logs into their account and provides street address, social security number, and a checking account number (only one account can be entered at this time).

3.      CheckSpace verifies the information against a credit database and approves the account for up to $500 in ACH transfers each week.
Note: A bank distributor could preregister its clients, doing away with the first 3 steps.

4.      Users wanting to move up to $2,500 per week can select the optional upgrade feature.

5.      CheckSpace sends two random deposits to the user’s registered checking account.

6.      After the confirmation deposits have been posted, the user logs back in and enters the dollar amounts of the transactions.

7.      Users wanting to move up to $5,000 per week must verify their snail mail address by inputting the code mailed to them when they signed up.

Elapsed time: In our tests it took slightly less than 2 minutes to complete the first part of the application (step 1) and skim the user agreement; then another 2 minutes to complete the email and bank account portion (step 2) - a total of 4 minutes. At every step of the way, confirmation emails arrived within minutes, so we knew that our account was active and appreciated. A simple one-page welcome letter arrived in the mail a couple days later containing a code to enable us to increase our spending limit. This was followed by a phone call from a CheckSpace service rep asking if we had any questions about getting started. Unlike many new companies, the startup process was smooth, and instilled confidence in the payment company.

Sending Money (email/ACH payment)

1.      User logs in to their CheckSpace account (or creates payments in QuickBooks or Peachtree accounting software).

2.      User selects the Payment button on the top.

3.      User enters the email address of the recipient (and optional name, address, phone number).

4.      CheckSpace sends an email to the recipient announcing the payment and an email to the sender confirming the payment.

5.      Recipient registers at CheckSpace (see Registration above).

6.      CheckSpace automatically transfers the amount into the recipient’s checking account (no cost to sender, recipient pays $0.95 per payment, with the first one free each month).

Payments are made by filling out the “floating check” form conveniently displayed in a pop-up window. Throughout the program, the user interface is well thought out adequately tested.

Sending Money (bill payment via paper check)

1.      User logs in to their CheckSpace account (or creates payments within QuickBooks or Peachtree accounting software).¹

2.      User selects the Payment button on the top.

3.      User enters the name, snail-mail address, and phone number of recipient.

4.      CheckSpace sends an email to the sender confirming the transaction.

5.      CheckSpace withdraws the money from the sender’s account via ACH.

6.      CheckSpace prints and mails a check to the recipient (sender pays $0.50 per payment; no cost to the recipient).

7.      Recipient cashes check.

Invoicing/billing

1.      User logs in to their CheckSpace account (or creates invoices within QuickBooks/Peachtree).¹

2.      User selects the Invoice button on the top.

3.      User enters the name and email address of the party being billed.

4.      CheckSpace sends the payor an email bill.

5.      Recipient registers with CheckSpace (see Registration above).

6.      Recipient authorizes the invoice and selects either ACH or credit card for the source of funds (credit card can only be used if the sender has enabled credit card payments in their account preferences).

7.      CheckSpace withdraws the money from the recipient’s checking or credit card account (no cost to recipient), sender pays $0.95 for an ACH payment (after the first free one each month), or $0.95 plus 2.6% of the transaction amount.                                                                                                              ð

¹Users can also create payments in QuickBooks and Peachtree and upload them in batches to CheckSpace. The company provides a downloadable virtual printer driver that supports sending payments and electronic invoices from QuickBooks and QuickBooks Pro 99, 2000, and 2001, as well as sending payments only from within Peachtree Complete Accounting versions 7 and 8.

Pricing: Costs are similar to PayPal, with PayPal usually having the advantage for lower dollar payments, $25 and under. But CheckSpace’s $0.95 flat-rate ACH price would be less on larger payments. The larger the payment, the bigger the savings, e.g., on a $500 ACH payment, CheckSpace would charge $0.95 vs. $11.35 for PayPal’s instant ACH or $5 for PayPal’s 3-day delayed ACH (see Table 4, below). But if the user paid by credit card, CheckSpace’s $13.95 fee would be $2.60 higher than PayPal.

Table 1

Pricing: PayPal vs. CheckSpace

Third-Party Providers:  Electronic bill pay is through MasterCard’s RPPS (sponsored through Mellon); paper bill pay is through FiServ; and clearing through Bank of America.

Wireless  Access: Users may schedule new payments and approve payment requests directly from a Web-enabled phone.

Web Tools: The CheckSpace icon can be added to auction-item listings or Web sites. When a client clicks on the link, a pop-up eCheck appears with a quick member signup so users can schedule a payment without leaving the merchant’s site. Merchants choose whether to accept credit cards or eChecks (ACH) only.

Table 2

CheckSpace vs. PayPal

Source: companies, 4/2/01

¹Features and prices for PayPal Business accounts; PayPal Personal accounts are entirely free to receive and send but have fewer features and are only allowed to receive up to $100 per month in credit card payments; individuals can upgrade to PayPal Premier which offers the same features and pricing as PayPal Business.

Pricing to Financial Institutions: The cost of CheckSpace’s ePayments Platform will likely run into six-figures counting the initial licensing fee, annual maintenance fees, and per-user charges. These costs could be partially offset with transaction revenue sharing. The platform can be customized for your needs; for example, if you already offer bill payment, you can turn off the paper bill payment portion of the interface. For more information, contact Dan German, Dir. Biz Dev., (425) 643-9905, bizdev@checkspace.com .

Analysis

We are bullish on the entire EBPP market and believe CheckSpace has developed a robust epayment product, earning our second Best of the Web designation this year. The winning aspects of its product line include:

Pros

• Integration of paper bill payment with email payments: CheckSpace is the first company to stitch together the “old” Checkfree-style bill payment, paper-based service with the “new” fully electronic PayPal-type email payment product, giving the user the flexibility and control to handle all payments in the most expeditious manner possible, all from one user-interface.
• Allows microbusinesses to accept credit cards easily and cost effectively: Securing a merchant account to accept credit cards has historically been a troublesome part of starting a business; CheckSpace solves that problem with its cost-effective email invoice and payments solution. Even though its pricing is somewhat higher than PayPal’s, the service should compete well, if and only if, it also carries the endorsement of a trusted bank or financial services brand name.
• Simple invoicing for microbusinesses: Although most small businesses already have an invoicing solution either through QuickBooks or other accounting or invoicing software, the microbusiness with just a few invoices each month, often uses a word processor for the task. CheckSpace’s invoicing option is a quick and easy way to zip invoices via email. Recipients then have the option of printing the invoice and mailing a paper check, or signing on with CheckSpace to pay electronically via credit card or ACH. It’s an excellent way for microbusinesses to maintain state-of-the-art services to their clients, without investing the time to learn a new software package.
• Works in tandem with an existing checking account: All transactions flow through the user’s existing checking account; unlike PayPal, no new transaction account must be established. Bank partners could even eliminate the sign-up process, making CheckSpace an automatic feature of the checking account; much like a money order is an optional checking account feature at the teller window.
• Integration with QuickBooks/Peachtree: Although we have yet to test CheckSpace’s virtual printer driver with QuickBooks and Peachtree, assuming it works as described, this integration makes CheckSpace’s system much more desirable, although Intuit is currently offering similar functionality via hardcoded links to Checkfree and PayPal.

Concerns

As much as we like the product, we have serious concerns about the viability of the business model. Even with the most optimistic assumptions, it won’t be easy for CheckSpace to gain a foothold in the marketplace. Why?

• Indeterminate near-term demand: Microbusinesses, the target market for the service, are just now beginning to adopt simple online banking functions such as balance inquiry.  These new users won’t be ready for email payments and invoices for a few years, and the hardcore early adopters already use PayPal and have little incentive to switch.
• Pricing confusion: There are different prices depending on whether you are a sender or recipient, whether the payment is sent by paper or ACH, and whether the funds are drawn from a checking account or credit card. It’s a bit much for a new user to comprehend. We also think the paper vs. ACH pricing is flawed. Senders are incented to use ACH to avoid the $0.50 per check fee. But this shifts the transaction cost to the recipient, who pays nothing to receive a paper check, but is charged $0.95 for each ACH (after the first free one each month). Unless it’s a real hassle to cash the paper check, and most businesses visit their branch more than once per week, why would a payee take the time to sign up with CheckSpace just to pay nearly a buck for each item?
• Entrenched competition: On the email payments front, CheckSpace must contend with the fact that most early adopters, and virtually all serious eBay sellers, already use PayPal or BillPoint. Most don’t want nor need another epayment option. And the referral incentive of a $10 usage credit isn’t enough to provide much of a viral marketing boost (cash is king). On April 24, only 85 eBay auction listings offered CheckSpace as a payment option compared with more than 2 million mentioning PayPal.  On the more traditional electronic bill payment side, Checkfree, which has dominated the industry for more than a decade, is offering similar functionality in its WebPay for Small Business product (see the full report for a description of Checkfree’s Web Pay for Small Business  www.checkfree.com
• Overlap with other bank products: Most of the banks that CheckSpace is targeting already use bill payment from Checkfree or others.  Banks considering adding CheckSpace to their current online banking product sets for small businesses must be concerned about how the new payment alternatives fit with existing bill pay, ACH, merchant services, and wire transfer services. We are especially concerned about the overlap in bill payment. It’s hard enough for banks to service a single bill payment program from Checkfree, Metavante, Online Resources or others. Few banks need more bill payment headaches likely to result from adding another vendor to the list. A simple solution would be to disable the paper bill payment option from the CheckSpace product, but that eliminates a key product advantage - the single user interface for both paper and ACH payments.
• Limited track record: CheckSpace did install the ePayments program for CompuBank’s small business section in March 2001, but NetBank’s plans for the service are not known at this time.  Until the company signs some deals and/or gets a year or two of experience servicing a critical mass of users, potential bank buyers will be very cautious, and the lure of providing an equity participation to early customers isn’t much of a motivator these days.
• Customer service: Our initial experience with the service is very positive, including same-day response on an emailed question, it’s unknown how CheckSpace will deal with the customer service complexities of a co-branded payment service. It’s an area that warrants much discussion and testing before entering into any arrangement with the startup.

• Payment timing: Because CheckSpace sends payments through the mail and ACH, and the company is trying to reduce payment risk, a 3-day delay is built into the payment window for most payments. The only exception is that paper payments of less than $100 from verified bank accounts are mailed the next business day. In our first experience, sending a $4 payment, the earliest we could schedule it to arrive at the payee was 7 business days later (8 counting the day the payment was initiated payment, 5:30 pm PST). To a new user thinking they would be making speedy payments, it’s a poor first impression. After calling the company, we learned that the extra 3 days was due to our bank account being unverified, something not clearly explained on the Web site. We like PayPal’s approach much better. Even on ACH payments, users have an instant payment option, where a hold for the payment amount is placed on the user’s credit card. If the ACH item is returned for any reason, the payment is charged to the card. In most cases, the hold is transparent to the user, so both the sender and recipient perceive the transfer as instantaneous.
• Cost to the financial institution: Although, everything is negotiable in Net banking these days, CheckSpace talks about six-figure contracts. While that might make sense for a top 20 bank, which would spend 10 or 20 times that much developing similar capabilities, smaller financial institutions are going to find it difficult to justify any major expense to deliver a service that will only be used by a small minority of its online banking users in the near term.

Opportunities for Financial Institutions

• Large banks: Large banks, looking to keep up with Bank One (eMoneyMail) and Citibank (c2it.com), which each have proprietary email payments, could private-brand the email payments component of CheckSpace for a fraction of developing the service from scratch.
• Smaller banks targeting small businesses: CheckSpace’s invoicing and credit card acceptance capabilities could be an attractive component of a microbusiness package account. Every business wants professional and cost effective billing and payment options. With CheckSpace, even a one-person operation can effortlessly offer paper, ACH, and credit card payment options for all their billings.
• Smaller bank and credit unions targeting individuals: Unless CheckSpace develops a lower-cost option, it appears the service may not be as cost effective to roll out to individuals; however, we encourage you to contact the company as business models and pricelists change faster than the wind these days.
• Viral marketing: Every time a payment or invoice is sent to a business or individual, the recipient must self-identify in order to collect the payment or pay the invoice electronically. This sign-on provides CheckSpace, or its bank partner, with an opportunity to sell payment and other banking services to the recipient. The downside is that recipients may be unwilling to register with the service just to receive your payment or pay your invoice electronically.