As the market grows for software that helps merchants set up shop on the Web, venture capitalists are getting behind online payment companies.
CyberCash (CYCH) has just raised a $10 million private equity round from Rose Glen Capital and The Palladin Group, CyberSource received financing from GE Capital's Equity Capital Group in December, and next week ClearCommerce will announce a second round of funding to be closed in a couple of months.
ClearCommerce has so far raised $7.5 million with investments by Voyager Capital and New Enterprise Associates (NEA), and new money from first round investors Austin Ventures and Internet Capital Group. ClearCommerce VP of marketing Steven Saltwick says the Austin, Texas-based startup was looking for another $3 million from a strategic investor, preferably a commercial company. That would bring the startup's total funding to about $14 million.
BEYOND BROCHUREWAREDemand for online payment software is growing alongside the boom in online shopping. More than $13 billion was spent on the Internet in 1998, and online commerce should reach $17 billion in 2001, according to Forrester Research.
Zona Research director Jack Staff says the gauntlet for traditional bricks-and-mortar stores has been thrown down. "Internet-based commerce is beginning to encroach on retail as a viable shopping experience for increasing numbers of Americans."
Traditional retailers are realizing the need to update their Web presence from "brochureware" sites to virtual stores with full e-commerce capabilities. That's where ClearCommerce, CyberSource, and a host of other online payment startups come in. They are developing back-end application packages for e-commerce that offer all the software a Web merchant needs to process a sale after the customer clicks a Buy button.
While each startup claims to be the only total solution for Web retailers, in reality there is little difference between their offerings.
"The payment area is very competitive," says Dataquest e-commerce analyst Erina DuBois. "Spotting the differences between companies is like comparing apples and apples."
She says that ClearCommerce and CyberSource are unique in offering features, such as fraud detection and security, above and beyond payment capabilities.
CLEAR DIFFERENCEThe main difference between the rivals is their business models. ClearCommerce is a product company that targets enterprise merchants and the service providers who host Web merchants. CyberSource and CyberCash, on the other hand, host the transaction-processing software as a service and charge customers for each transaction.
Ms. DuBois says the CyberSource-CyberCash outsourcing model appeals to small and midsize Web merchants, who find it difficult to implement and manage complex software. Companies such as Cisco that process a huge number of transactions, on the other hand, would prefer to buy the software and control it in-house, а la the ClearCommerce model.
Another advantage to the ClearCommerce package for companies that handle a large volume of transactions is the option of linking to Internet, leased lines, or dial-up connections.
"This helps with performance, security, and reliability," Ms. Dubois says.
ClearCommerce recently nabbed one of CyberCash's largest former customers, Cardservice International, which processes $6-7 billion in credit card transactions each year.
"We evaluated ClearCommerce against a number of competitors, including Open Market, CyberCash, and VeriFone," says Caeser Berger, senior vice president of Cardservice's Technology & Products Group. "[It] was the clear winner in terms of its scalable architecture and strong fraud protection.
Cardservice International also preferred the fixed-cost price, saying that with its large number of transactions, a pay-per-transaction fee could have hurt its bottom line.
While ClearCommerce is more suited to processing large volumes of transactions, CyberSource will continue to be more popular with smaller and less technically savvy Web retailers. As bricks-and-mortar retailers flock to the Web and the trend to outsourcing continues to grow, CyberSource may be able to consolidate its market position.
The San Jose-based startup put off a public offering in 1998, but is expected to file sometime this year. Mr. Saltwick says ClearCommerce will also go public, but was waiting for "the right timing."