First Data Corp.'s ultimate ambition can only be described as breathtaking: to own a chunk of every consumer's every electronic transaction, coming and going.

To this end, FDC, the nation's largest processor of credit-card payments, is covering all its electronic and Internet bets. It's developing technology to surround digital commerce—from the first swipe of an ATM, debit, credit, smart, or "e-check" card through to the eventual "electronic presentment" of, say, utility bills for a consumer to pay with a simple click of a mouse. And, almost as a means to reuse its own exhaust, the company has created a growing database of some 30 million cardholders that lets FDC track (and sell reports on) consumer buying habits.

Given that FDC is teamed with mighty Microsoft on electronic billing, and given its experience in handling literally billions of transactions annually, the company sounds like it knows exactly what it's doing. Right?

Maybe. Like many established companies, FDC, which has $5.2 billion of annual revenue, faces plenty of pressure in its existing businesses. For instance, consolidation in the banking industry—which means fewer, more powerful clients—is squeezing profit margins in its credit-card processing business. So, FDC has to manage skillfully through some short-term problems before it can get to its longer-term answers.

Even in the short term, securities analysts are bullish on FDC's prospects. But turning long-term possibilities into buckets of revenue and profits is no small task. Henry "Ric" Duques, FDC's chairman and chief executive, says bluntly: "Lots of ideas are great ideas. But what we find out is that most things don't work. . . . And almost all things take a lot longer than you think."

FDC does appear to be doing one important thing right. It's investing in a broad portfolio of breakthrough possibilities, with the idea that one big winner could more than pay for the rest. If there's a killer app out there in the world of electronic payments, FDC is giving itself a good chance of finding it.

When FDC executives think about what happens if an established company misses a fundamental change in its market, they don't have to look any further than Western Union, which FDC bought in 1995. The 147-year-old company reacted to the advent of the telephone in a famous 1876 memo that said: "The telephone has too many shortcomings to be seriously considered as a means of communication. The device is inherently of no value to us."

With Western Union in mind, the 53-year-old Mr. Duques keeps a sharp eye out for disruptions that could alter his business. In 1996, he began looking at the possibilities of presenting bills to customers over the Internet and then handling the payments electronically. The opportunity seemed explosive. FDC estimated that Americans pay more than 14 billion recurring bills annually, through a cumbersome process that costs billers and payers more than $1 a bill. Moving bill-handling to the Web would slash mailing and many processing costs. It would save consumers much of the time that they now spend writing checks and could give them fast access to historical records on old bills and payments. Whoever had the idea first, if he got it right, could dominate the multibillion-dollar opportunity.

Thinking about possible partners, Mr. Duques didn't have to look too far. Microsoft was also thinking seriously about electronic billing and approached FDC on the subject. The FDC chairman thought Microsoft might have the right mix of brand, capital, and technical expertise. So, a meeting was set up for Mr. Duques and Steve Ballmer, who has been Microsoft Chairman Bill Gates' right-hand man for 20 years but who kept a low profile until being named Microsoft president in 1998. Mr. Duques didn't, in fact, know who Mr. Ballmer was. "I did a little checking and found out he was worth about $4 billion," Mr. Duques says. "So I figured he must be important."

Talks started around the middle of 1996, and the companies announced a joint venture in 1997. The venture, first called MSFDC and now called TransPoint, is in pilot testing with 28 billers and five banks.

The project seems to be well-designed. Among other things, TransPoint has tried to work its way around possible objections that it was trying to steal the customer relationship from banks and billers that had always dealt directly with their customers. TransPoint is set up so that banks can present the total list of bills to a customer who signs on to the TransPoint Web site. When that customer wants to pay, say, a utility bill, he will be switched to the utility's site. The utility can then provide ways to find historical billing information, handle inquiries, or provide other services—all the while protecting its relationship with the customer.

TransPoint also gained some momentum over the summer when it signed up Citibank as an equity partner. And, so far, at least, TransPoint and its competitors have stuck to an important compromise. They have agreed to make their systems compatible, which not only makes it easy for customers, billers, and banks to switch from one to another but which avoids the confusing technology fights that have kept many new ideas from taking off as fast as they might have.

There are still plenty of difficulties ahead. TransPoint has to win the trust of banks—which smarted when Mr. Gates compared them to dinosaurs. (He later amended that to say he meant only that their computer systems were pre-mammalian.) TransPoint must also deal with well-heeled competition from Integrion, a venture owned by 17 banks (including Citibank), IBM, and Visa USA. More big rivals will surely appear.

Who will win, and how quickly will the market develop? James Shelton, executive director of the Online Banking Association, a trade group, says: "Nobody has a crystal ball." Mr. Shelton wryly adds that "being a pioneer" is an advantage "only if you're right and can avoid the arrows."

Actually, TransPoint is only a small part of the vision that Mr. Duques and his senior managers have for electronic commerce. In all senses of the word, a huge focus is the nearly six billion credit-card transactions FDC already processes annually, handling such functions as authorization, transaction capture, settlement, and reporting.

Mr. Duques says that in 1995 only 15% of consumer-to-business transactions used electronic means such as credit cards; 65% were cash, and 20% were checks. By 2000, 30% of the transactions will be electronic, he projects, and, by 2005, half will be.

"It's enormous what's happening at the point of sale," Mr. Duques says, pointing out that the 30% figure in 2000 will represent 55 billion electronic transactions—mostly debit cards, credit cards, ATM cards, and stored-value cards.

"That's why we're very excited about where we are on the merchant side of this business," Mr. Duques says.

Trying to build on its strength at the point of sale, FDC is testing a variety of e-products, such as electronic check acceptance. At Wal-Mart Stores, FDC's TeleCheck Services has slightly modified credit-card terminals so that they can pick the routing, transfer, and account number information off a check when a checkout clerk swipes it through the terminal. The store clerk keys in the amount, and the system produces an authorization for an automated clearinghouse to transfer money to the merchant. The consumer signs the authorization and gets his check back. No checks to be deposited by the merchant; no checks in the mail to the consumer.

Competitors argue that the e-check is too much like a debit card, which has caught on in other countries but which has been slow to take hold in the U.S. But FDC's research shows that 82% of people testing the e-checks have no problem with them. And the others involved in the transaction have lots to gain. The merchant, its bank, the customer's bank, and FDC all save money on processing the payment. The merchant gets its money faster. And the merchant will be able to get all its credit-card, debit-card, and check records in one (presumably electronic) summary settlement statement.

Even Western Union is proving to have interesting possibilities. Western Union is a mature company by any standard. Yet, in the first half of 1998, this old telegraph company—which may well have been the originator of electronic commerce, through its wiring of money—contributed 31% of FDC's revenue and 42% of its profit. Western Union's revenue is growing more than 20% a year.

Western Union is experimenting with a host of new payment services to offer the "unbanked," and "underbanked"—the almost one-quarter of U.S. households that do not have a relationship with a bank or that maintain less than $200 in their accounts—says Doug McNary, president of Western Union North America.

Mr. McNary plans, among other things, to update the technology in Western Union's enormous network for wiring money. Western Union already has in place a distribution network of 25,000 U.S. locations and another 25,000 internationally—to allow, for instance, Mexicans working in the U.S. to simply go to a grocery or convenience store and wire money to relatives back in Mexico.

The plan also involves rearticulating the Western Union brand, which still summons up images of uniformed messenger boys who look like a young Mickey Rooney and who run through the streets with stacks of telegrams. While the brand is a little frayed around the edges, Mr. McNary says focus-group research found it to be more trustworthy than the Federal Deposit Insurance Corp. "That's a great brand," he says.

As FDC grapples to develop products, the company is also working to find better ways to transform the tidal wave of information it collects into valuable products for its clients. Mr. Duques sees a big opportunity in the fact that the lush days of the 3% response to direct-mail marketing campaigns appear to be over. Now, mailers are getting responses closer to 1%. "It costs a lot, and you get very little back," Mr. Duques says. "So anything we can do to help our clients target-market—they're very interested in that. If you can move that response rate to 1 1/2% or 2%, that's big money to them."

FDC is tackling target marketing in several ways, the most advanced of which is the U$A Value Exchange, a big database that FDC uses to track cardholders' buying habits. "Let's say you are an FDC client, and you have 10 million cardholders," Mr. Duques says. "And of the 10 million, 5,000 travel as often as management consultants and stay in Ritz-Carlton-type hotels, but not at the Ritz-Carlton. We can go to the Ritz-Carltons of the world and say, We know where there are 5,000 people who took seven trips each last year and stayed in $200-a-night hotels, but not yours."

Mr. Duques says FDC then asks the hotel chain what it would give to entice those people to try its hotels. "They might say a basket of fruit and a bottle of wine," he says. "But we tell them, We want a big thing, like their first night—up to $500—for free." FDC and its customer, the credit-card issuer, take a cut; the customer gets a significant incentive; and the hotel gets some new, valuable customers.

David Hunt, chief executive of Global Payment Systems, a smaller competitor that is a subsidiary of National Data, is doubtful about the near-term prospects for information management. "So far," he says, "it's been a yawn."

But Mr. Duques says U$AVE, which is based on information provided by more than 40 bank partners that issue credit cards, is nearing break-even. And he is enthusiastic about its prospects because everyone involved gets such clear benefits. "It's been a long time coming," Mr. Duques says. But "we're starting to see the dream realized here."

Charlie Fote, who was recently named president and chief operating officer of FDC, echoes Mr. Duques' statement that few things work as planned. He says he has built a collection of famous, ill-conceived predictions. Among his favorites: when Thomas Watson Sr., chairman of IBM, said in 1943, "I think there is a world market for maybe five computers." With so much uncertainty, Mr. Fote says, "You're not going to win them all. So you better have more than one iron in the fire at the same time."

Mr. Hamilton is senior editor of Context. He is reachable at hamiltonk@diamtech.com.

RIPPLE EFFECTS

If First Data Corp.'s vision of electronic bill presentment and payment comes to pass, changes would ripple to every corner of industry. Everyone's costs would drop. Perhaps more importantly, the roles of all those involved in payments—from the billers to the banks to other intermediaries to the payers—would shift in fundamental ways that would create opportunities for some and peril for others.

FDC's and others' programs are still in the test phase, and big new ideas like electronic bill presentment and payment tend to take a while to shake out. But, on the theory that it's never too early to start preparing for earthquakes, here are ideas that some experts are mentioning as possible repercussions. To start with the obvious:

—The U.S. Postal Service, which delivers roughly 35 billion bills a year, would lose billions of dollars in revenue if all bills were sent and paid on-line. The Postal Service would have to close facilities and lay off tens of thousands of employees, hurting local economies (and possibly giving new meaning to the term, "going postal.") Even having 10% of the bills paid on-line could mean $1 billion a year of lost revenue and thousands of layoffs. If the Postal Service gets hit hard, then so do the airlines that carry so much mail. Likewise the companies that print the stamps, make the uniforms, and build the trucks that carry the mail.

To move to the more speculative:

—Massive, spontaneous buyer cartels could develop if e-bills are set up so that a payer can contact others who have made similar purchases.

Intermediaries could easily make such links possible even though, to date, most of the focus has been on helping sellers, not buyers, coordinate their efforts. Sellers would resist the cartels, but those buyers who found they overpaid for a washing machine could, as a group of dozens or hundreds, threaten to renege unless they got a better price.

—E-bills could be used to start conversations that go well beyond what billers do now when they include promotional materials in their monthly statements. When 6'11" Big Ira pays his tailor's e-bill for some golf pants, he could be presented with a link to Tall Al's golf store. The garbage-collection service could try to steer e-bill payers to information on building compost heaps.

—The whole billing process could become more flexible. There'd be no need to bill monthly, for instance. Billers needing cash could conceivably even vary the amount of a bill, cutting the price for those who pay sooner.

—"Buyers' remorse" could become an even bigger problem. If someone thought he was spending perhaps $500 a month on clothes and, because of summary capabilities built into an e-bill system, found out he was really spending $1,500, he could easily be tempted to send things back.

Retailers might wonder why they'd sign up for something that would increase buyers' remorse. The point is that if the cost-cutting benefits of e-bills are as compelling as they appear to be, then retailers and anyone else hurt by the change eventually would have no choice but to go along. —Timothy J. Rohner