The program has two separate functions: replace (which replaces an entire string) and replace characters (which replaces individual characters). You must have been using replace chars when seeing each letter replaces.

And no, this is not a front-end to a system command. It is written entirely in Java, and runs on Unix, Windows and Mac systems.

This can be done so much easier with Automator, incremental numbering etc.

PSRenamer is the only (free) renaming tool I know of that supports incrementing files names not only with numerics but also with alphabetic characters, using the select-all wildcard *.
Now while there often may be more files in a given directory than those to be renamed, here's a usage tip for renaming with alphabetic increments: use first line to choose only the files to perform rename action on, and leave "action" blanc. Then, when using using * for alphabetic incrementing in the second line, PSRenamer will only take over whatever files are selected from first line instead of all files located in the selected directory.
Kudos to the developer patiently opening my eyes for this somewhat hidden power.