Webware

When you buy a product online and use either a credit card or Paypal, a significant percentage of your transaction cost--from 2.5 percent to 4 percent when all the fees are considered--goes straight to either the credit card processing company or to PayPal. With so many retailers operating at such slim margins already, this is a material expense. While payment processing will probably never be free, a new company, Noca, is launching today that undercuts payment processing by an order of magnitude: It charges just 0.25 percent for transactions.

Noca, CEO PJ Gupta told me, does not enable credit of any sort. Rather, it's a financial interchange platform that lets consumers pay for goods through direct checking account withdrawals.

Gupta told me he was formerly in charge of Visa's network architecture, and that Noca is built in a more efficient way. "There's no reason to use IBM servers today," as the credit card processing companies do. "There are two to three order of magnitude of inefficiencies there."

He also says that Noca is more secure. Transactions are handled and encrypted by Noca's servers; merchants never see the checking account and bank routing numbers consumers enter (the same is true of PayPal transactions). An additional, adaptive security comes in to play depending on the type and amount of the transaction.

In a live demo where Gupta was buying $10 worth of digital goods from early Noca customer Klatcher, the system asked for a mobile phone number, sent a PIN to it, and required the user to enter that PIN on the transaction form. I didn't see how that added any security at all (the buyer could give out any mobile number), but Gupta told me that if the transaction had been for more money or for physical goods, the verification process might have incorporated Yodlee's system of challenging the buyer to produce personal information from financial records, such as selecting an accurate previous address or amount of the buyer's regular mortgage check.

To pay using Noca, get out your checkbook and copy down some numbers.

Gupta believes that the technology he's built to link into the banks, prevent fraud, and do so cheaply is a competitive barrier. But I am surprised that his customer roster at launch is sparse--only three vendors, and probably not one you've heard of. There are a dozen companies evaluating the system or getting closer to launching with it, Gupta says. There will be major vendors online with Noca, "well before June 30," he promised.

One downside: Noca doesn't offer chargeback or dispute arbitration services. That's between merchants and their customers. But it does give consumers far more detailed transaction statements than credit cards or bank accounts.

Noca is a smart company for the current economy. Credit is tight for everyone, including consumers, some of whom are losing or just throwing out their credit cards. Noca makes online purchasing easy and secure even without credit. And its lower fees could help make goods purchased online less expensive, too.

In 2001, the first dot-com economy collapsed. New companies couldn't raise funds to continue operating. Existing companies couldn't go public or get bought. My employer (Red Herring) folded, as did hundreds of other businesses. Almost all companies with speculative growth-based (as opposed to revenue-based) business models died off. And Aeron chairs flooded the market.

We're heading into another start-up downturn right now. Erick Schonfeld on TechCrunch points out how the credit crunch will lead to a venture crunch, and Jason Calacanis' latest e-mail newsletter predicts that "50-80 percent of the venture-backed start-ups currently operating will shut down or go on life-support" within the next 18 months (italics mine). Is it time to panic?

I don't believe so, although to operate as if the world isn't changing for young technology companies is equally irresponsible. There are similarities between the current economic picture and the last bubble, but there are differences as well, and they are important for start-ups. Here are a few things new company CEOs might want to consider as they formulate a strategy for surviving the next 18 or so months of what is likely to be a weak economy.

Advertising is a trailing indicator. If your business is based on advertising revenues of any kind--from big sponsor contracts to Google ad words--count on it diminishing drastically in coming months. Reduced consumer spending means less advertising (I don't care what Digg says), and it sometimes takes a quarter or so for contracts and plans to unwind. What appears to be stable advertising income cannot be counted on.

Rotation into business. As the consumer economy slows, most companies will search for additional revenue strategies, which will likely include selling to business if the companies are currently consumer-focused. Get ahead of that curve. It's more difficult to sell a contract to a medium or large business than it is to push goods and services on individual consumers, but business products generally support more predictible margins and slower churn. However, to sell to business you need products that are more robust than single-feature Web sites, and you need a top-flight sales team. B2B products don't sell themselves.

Nobody trusts start-ups. Regarding the above tip...You may think you have a product or service that plays in business, but you're going to have a hard time selling it. Big business won't trust a start-up. And why should they? Underfunded, undisciplined opportunists don't often have stable, secure, or scalable services that real business needs to operate. Your best bet is to partner with a company that is already selling to business. Don't try to go direct. Yes, you'll lose a lot of your margin. Them's the breaks.

Forget the VCs, head to the angels. Although venture capitalists may be affected by the credit crunch, since they rely on their partners' funds that could be harder to scare up, this should not affect as much the availability of capital from the angel investors, generally early-stage investors who put their own money into companies. The challenge is that while angel funding is often enough to get a company launched, you won't find the multimillion-dollar funding rounds in that ecosystem that you might need to develop the big product that big companies will buy. But for early-stage development, now's as good a time as any. It costs a lot less to get a product off the ground now than it did seven years ago. It's the scaling and selling that's the challenge.

No credit. One of the biggest and most ominous differences between the 2001 pop and the current crunch is that companies will have an even harder time securing credit today than they did then. A few companies, like Ning, managed to load up on cash for the "nuclear winter," but for other firms it's too late. So it goes without saying that companies should do everything they can to conserve resources. That doesn't mean folding up shop. It does mean to lay off the fancy parties and expensive conference travel.

Spend into the recession, or move. If you have a runway of funding to last out a bleak year, don't panic. But most of all, don't stand still. Go under the radar and build your product. Talk to your potential customers. The clouds will lift eventually--and if not in this economy, then perhaps in another, like China or Dubai. As a friend of mine said: "I go where the construction cranes are."

Related: Why the credit crunch is about more than Wall Street.

Amazon has invested in the alternative payment processing company Bill Me Later, a very clever system that makes it easy for consumers to acquire items at online stores without entering an account or credit card number. The system only asks for your birth date and the last four digits of your social security number. From that information it determines if you're an acceptable credit risk, and if you are, it completes the purchase and signs you up for billing and for the plan's credit terms.

Bill Me Later is an extraordinarily easy way to pay for a product or service, but smart consumers should avoid it. Here's why: it's a credit plan, and one with very high rates. While Bill Me Later purchases that are paid off before a certain period (90 days for purchases up to $500, six months for purchases more than that) are interest-free, if you miss that cutoff you'll be responsible for paying 19.99 percent APR interest backdated to the point of purchase. It's the standard, "Make no payments for six months!" scheme that low-end furniture shops use. It's great for the debt holders, but bad for consumers.

Buy now, pay later.

It's also great for Amazon, which has a history of offering payment schemes that encourage impulse purchasing. 1-Click shopping and Amazon Prime both defer the presentation of the real costs of acquiring products. Also, Amazon is establishing itself as a Web services company as well as a commerce site, and this investment gives it yet another product it can market to its services customers.

You can experiment with Bill Me Later right now on several sites, but if you already have a credit card at a more reasonable rate (and with useful features like reward miles and extra warranty protection), you'd be better off using that instead. If for some reason you don't, you'd probably be wise to not buy stuff online anyway.