Who will own electronic commerce?

Fast forward a couple of years to an imaginary future when Microsoft and Intuit (or Microsoft alone) has established a near-monopoly on electronic commerce. In this well-wired universe, we'll all use Quicken (or Money) and the Microsoft Network to write paperless checks, manage credit card transactions, buy and sell stocks, and perhaps even order our groceries on-line. And every time we send our money through the electronic toll booth, another few cents will flow into Microsoft's bulging bank account...

That's a scenario that scares a lot of people, but in reality there's a great leap of faith here--that the companies who control the front end interface with consumers will also control the back end processing of these potential billions of electronic transactions. In fact, we suspect just the opposite may happen: Most of the fees will end up flowing to the spider web of transaction processing firms--banks, credit card associations, brokerage houses, and the like--who currently own the nearly invisible infrastructure of electronic commerce.

It's easy to mistake these back office service providers as dinosaurs, because they often demonstrate surprising stupidity about consumer marketing. (Citibank, one of the savvier players in the on-line arena, has just now figured out that charging customers higher fees for electronic transfers isn't a promising method to win over users of paper checks.)

But the transaction processing industry finally seems to be getting its act together. The immediate impact is likely to be a proliferation of private label personal finance packages, which the processing firms will simply give away to lock in customers. NationsBank and BankAmerica just spent $35 million to buy Managing Your Money; firms like Fidelity, Schwab, American Express, and EDS are all poised to develop (or enhance) PC-based software for managing on-line transactions.

We don't expect private label finance software to make deep inroads among high-end users, who are likely to stick with Quicken and Microsoft Money. But Scott Cook likes to point out that Quicken's real competition has always been the pencil--a way of pointing out that the average check-writing consumer doesn't expect power features. If banks and credit card companies deliver a simple, clean product with a trustworthy brand name, we suspect they'll grab a large chunk of the 90% of households that haven't yet embraced any personal finance software.

In fact, it's probably far easier to create Quicken knockoffs (or pay a company like Intuit a per-copy licensing fee) than to replicate the incredibly sophisticated back room technology that underlies even a straightforward credit card approval transaction. Increasingly, moreover, the processing firms keep finding ways to make these transactions "smarter"; Visa, for instance, has just installed a neural net system that uses sophisticated pattern detection to spot credit card fraud. By comparison, the PC community is still trying to figure out a safe way to accept an on-line credit card transaction.

But ultimately the competitive issue in electronic processing is good old-fashioned efficiency--measured in fractions of a penny per transaction for millions of transactions per hour. Good as Microsoft is at most things, it's not a company that handles small change very well. In fact, Microsoft lately has been looking for ways to stay out of the small-scale transaction business; it plans to outsource monthly billing for its Network subscribers and doesn't even want to handle single-copy order fulfillment for Windows 95.

In short, it probably doesn't matter whose software ends up-on the consumer's PC. The real toll collectors in electronic commerce are likely to be transaction processing firms--and if there are billions of dollars in fees to be earned, we suspect they'll capture the lion's share.