Banking giant Citibank announced Thursday that it will soon remove fees for all U.S. transactions on its c2it online payment service. Previously the company charged people 1 percent of the transaction cost to send money.
Citibank made the change to expand the number of users of its service and of online payments in general, said Antony Jenkins, chief operating officer of c2it. The service has about 200,000 users, compared with about 11 million users for market leader PayPal.
"We think this is a key opportunity for Citigroup," Jenkins said. "Removing the price point is important because it allows us to grow quicker.
"That's where we're focusing our efforts, on getting customers to try our product. It's really a classic marketing approach."
The pricing change at c2it, which does not affect international transactions, could shake up the market for online payment services, said Jim Van Dyke, a financial services analyst with Jupiter Media Metrix. Auction sellers, which are among the prime users of online payment services, tend to be very price sensitive, he noted.
"This changes the landscape of things," Van Dyke said. "I think this will force a response from every competitor."
However, PayPal spokesman Vince Sollitto said c2it's pricing change would not force PayPal to rethink its pricing.
"This has been tried before by other folks," Sollitto said. "It's usually a reflection of the value of the service. You know that a service is successful when you can convince people to pay for it."
The battle for the online payment market has mostly been fought between PayPal and eBay-backed Billpoint. Although PayPal has enjoyed a considerable lead over Billpoint in customers and transactions, the company and its customers have accused eBay of using various methods to unfairly boost Billpoint usage. Most recently, many eBay users accused the online auction giant of using its Auction for America charity auction to promote Billpoint.
Earlier this month, PayPal made a move in the opposite direction of c2it, announcing that it would require all members who accept credit cards to upgrade to one of its fee-based accounts. Previously, PayPal exempted from its fees members who received $100 or less in credit card payments in a given month.
PayPal, which filed for an initial public offering in September, charges most sellers 30 cents plus 2.9 percent of the transaction amount to receive each payment. eBay-backed Billpoint charges 35 cents plus 2.5 percent of the transaction amount to receive payments in most cases.
As part of c2it's new pricing plan, users of the service will be able to send and receive money from a credit or bank account for free on all domestic transactions. The service will charge a $3 fee to cut paper checks to people for balances in their accounts.
The service charges between $10 and $15 per transaction to send money internationally.
The free transactions for online payments are a kind of back-to-the-future approach for the online payment market. Initially a free service itself, PayPal didn't begin charging customers until June of last year.
Although PayPal initially expected its revenue to come in large part from investing and drawing interest off the money in its users' accounts, that approach proved unworkable. Despite its popularity, the company lost $169.5 million on $14.5 million in revenue last year.
But the free c2it service could prove more viable. Much of PayPal's losses came from the costs of accepting credit cards, which PayPal did not issue until recently. In contrast, about half of the transactions going through c2it involve Citibank credit cards or bank accounts. Citibank essentially pays the fees for such transactions to itself.
In addition, by making c2it a free service, Citibank could help draw customers to its banking, brokerage and insurance services.
Although c2it's Jenkins said that charging users of the service for sending payments is a feasible strategy in online payments, Jupiter's Van Dyke disagreed.
"I think this is an admission that charging the sender won't work," he said.