Wednesday, October 15, 2008
It all began in October 1983 when payments industry pioneer Paul H. Green founded The Green Sheet as a four-page monthly newsletter produced by a staff of two. It was reproduced on a copy machine and distributed to American Marketing Corp. (Amcor) sales reps as a resource and tool to support them at their jobs.
Remember, Amcor was the first ISO in the United States, founded by Paul in 1982. With the vision of building a network of ISOs across the nation, Amcor was also the first Super ISO. In its first year of operation, Amcor sold $1.5 billion – yes, with a "b" – of new bankcard business.
Paul's position within the payments industry and his passion for the craft of honest selling made him ideally suited to deliver timely news and opinion about the industry.
As with most overnight successes, it took almost 10 years before The Green Sheet expanded its readership base beyond Amcor reps to reach a much wider audience of over 1,100 ISOs and nearly 150 individuals.
In March 1994, Paul's now ubiquitous “Good Selling” signature appeared for the first time in the newsletter. About a year later, distribution of The Green Sheet had grown from 300 copies per week to 2,200; the content had expanded to six pages; and it became a biweekly publication now received by thousands of sales professionals, ISOs, third party service providers and even banks.
In the first April 1994 issue, the influential Resource Guide made its first appearance. A few months later, the letters to the editor feature debuted with one letter. By 1995, The Green Sheet had gone "hi-tech" with an e-mail address through America Online.
But The Green Sheet was only getting started. A full blown Web site soon followed. April 1997 ushered in the first issue of the newsletter to include paid advertising. In June of that year, GS Online tabulated 607 individual readers daily. In the spring of 1999, The Green Sheet officially bloomed into a magazine at 28 pages.
As the magazine and Web site continued to expand and mature, The Green Sheet Inc. got new, expanded digs in Rohnert Park, Calif. In 2001, the fabled Advisory Board was formed and GS Online, which now included a revamped ISO Forum, averaged 15,000 hits a day. In 2002, The Green Sheet won the first three of its 35 APEX awards. In 2003, the popular Street Smarts column was launched.
In March 2003, Paul originated the term merchant level salesperson (MLS) at the National Association of Payment Professionals conference to differentiate the individual feet on the street from the ISOs for which they worked.
Later that year, the publication celebrated its 20th birthday. By then, The Green Sheet had established itself as an industry powerhouse, with a breadth and depth of coverage of the payments industry surpassed by few if any other trade publications.
Now that the magazine has reached its silver anniversary, and its accompanying Web site is in its third evolution with an average of 150,000 hits per day, it seems fitting to look back on 25 years and chart the broad sweeps and individual moments that have shaped the payments industry.
Of course, the news that dominated the industry over the last 25 years concerned the business practices and legal machinations of Visa Inc., MasterCard Worldwide, American Express Co. and Discover Financial Services.
It seems there has not been a time when the card brands (Visa and MasterCard were considered Associations) were not fighting in federal court. Every great conflagration is ignited by a spark. The flint that lit this firestorm came in March 1987 when AmEx unveiled its low interest rate Optima credit card.
The card was seen by banks as a product consumers would purchase since it offered a 13.5 percent interest rate, compared to over 18 percent on cards issued by Visa and MasterCard.
Naturally, Visa saw the Optima card as a threat to its business and promptly "asked" its 5,500 Visa-issuing banks to "rethink" selling AmEx products. AmEx alleged Visa's action was a violation of antitrust laws and got the U.S. Department of Justice involved.
The Green Sheet reported in June 1987 that Visa had been warning its member banks for years to beware of AmEx's long-range intentions, believing AmEx would eventually compete rather than cooperate with Visa. It's dire prediction came true with the Optima card.
In November 1987, however, the lawsuit was thrown out when the federal judge ruled the plaintiffs had failed to demonstrate Visa had conspired with banks from selling AmEx products. But that wouldn't be the end of litigation … only the beginning.
In September 1988, The Green Sheet proclaimed in a headline: "Visa declares war on Amex/Discover Card." Visa told its member banks that selling AmEx or Discover cards violated Visa's operating agreements. If banks did not sever their ties to the competing card companies, Visa threatened to terminate its relationships with those banks, which would have crippled said financial institutions.
At that time Visa and MasterCard controlled a combined 75 percent of the $1.3 trillion in credit card transactions made annually in the United States.
Over a decade later, the parties were still duking it out, this time with MasterCard and Discover thrown into the mix. In June 2000, AmEx and Discover accused Visa and MasterCard of the same anti-free-market tactics from the previous decade – stifling competition by barring member banks from issuing AmEx or Discover cards.
Exchanges grew bitter and personal as the four executives from the competing companies testified in open court. The AmEx chairman said Visa and MasterCard operated as one entity "under the guise of two names." And the chairman of Wall Street investment firm Morgan Stanley Dean Witter & Co., which owned Discover, called Visa the "ringleader" of a joint effort to lock out smaller credit card companies.
"The real Visa, not the benign image painted by its lawyers, operates on a cloak of secrecy," the investment firm chairman said. "Open up competition among the card networks so that market forces, not the conspiratorial acts of two dominant competitors, determine market success."
Over a year later, in November 2001, a New York federal judge ordered Visa and MasterCard to abolish their policies that prevent banks from issuing other card brands, stating that the policies "weaken competition and harm consumers."
The "honor all cards" ruling was called a landmark victory for AmEx and Discover that could shift the balance of power in the highly competitive card industry, taking away market share from Visa and MasterCard and giving it to AmEx and Discover.
Visa and MasterCard appealed the decision with the U.S. Supreme Court. In October 2004, the highest law in the land put an end to this credit card war by deciding in favor of AmEx and Discover, and it opened the floodgates of lawsuits leveled against Visa and MasterCard by other networks that believe they were harmed by the card Associations' restrictive policies.
In all, around 20 lawsuits were filed against MasterCard – many say a main reason the Association went public in 2005 was to raise capital to fight those suits. At the time, many wondered if Visa would follow. Visa did, on March 19, 2008; it became the largest IPO in U.S. history.
In February 1989, the card Associations pondered charging different types of merchants different interchange rates. At that time, Visa and MasterCard had only three interchange categories: authorization at the POS, electronic data capture and paper transactions. But by segmenting the market and charging merchants different interchange rates, the Associations figured they could substantially increase revenue.
Of course, they did, and over the years rate categories proliferated like rabbits. As of 2008, the number of categories stood at approximately 350.
In the mid 1980s, The Green Sheet was among the first publications to make public Visa and MasterCard's interchange rate charts, and the card Associations were not happy. But knowledge is power, and Paul was adamant about getting that information out to ISOs.
Today, merchants routinely bemoan the ever rising cost of interchange. In April 2005, we reported the National Retail Federation, which represented companies owning 1.4 million retail outlets nationwide, warned that "interchange is out of control." Morgan Stanley said interchange cost retailers $17.4 billion in 2004, up from $9.4 billion in 1998. Morgan Stanley projected interchange would cost merchants $32.4 billion by 2010.
"Increases of this magnitude are unconscionable, especially when transaction costs are declining, and plastic is becoming the predominant form of payment in the U.S.," the NRF's Mallory Duncan said. "Banks are on the verge of killing the goose that laid the golden egg."
By the summer of 2008, the NRF's lobbying efforts in Washington proved successful when the U.S. House Judiciary Committee approved legislation entitled the Credit Card Fair Fee Act. If passed, the legislation would allow merchants to negotiate interchange fees directly with Visa and MasterCard.
The federal government, it seems, was slow to notice that the payments industry even existed. Once it did, however, the legislation and regulations introduced on Capitol Hill increased exponentially. Prior to 2007, bills related to payments trickled through Congress. But in 2008, the proverbial legislative dam opened, potentially impacting the industry as never before.
2008 has proven to be a legislative touchstone for the payments industry. As mentioned above, the Credit Card Fair Fee Act threatens the foundation of the industry.
But another act will definitely have an impact. On July 29, 2008, the American Housing Rescue and Foreclosure Prevention Act of 2008 (HR 3221) was signed into law and will take effect Dec. 31, 2010.
Acquirers will have to report and turn over aggregate dollar amounts of credit and debit card transactions for merchants who process more than 200 transactions – or $20,000 in transactions – per year to the Internal Revenue Service.
Finally, Nov. 1, 2008, is the deadline for businesses to comply with the 37 Identity Theft Red Flags Rules of the Fair and Accurate Credit Transactions Act of 2003 (FACTA). Red Flag guidelines include 15 assessments related to three principal elements of the rule: address discrepancies, card or check requests within 30 days following address changes, and ID theft and red flag conformity.
FACTA requires ISOs to implement additional fraud and risk management solutions for its merchant clients.
Back in 1996, a letter to the editor said, "The acquiring side of the bankcard business is dead." The reader went on to say the only things left for ISOs to sell merchants were paper products and new POS equipment, and that was even harder to do because banks were squeezing out ISOs by selling terminals directly to merchants.
Over the last 25 years, The Green Sheet has charted the dire warnings of impending catastrophe to ISOs' and MLSs' livelihoods. Back in 1989, we reported that Visa and MasterCard were discussing ISO registration, which would require all ISOs that wanted to sell card processing to merchants to be registered with a Visa or MasterCard-sponsored bank.
We likened the proposed changes to "somewhat like hearing your worst enemy just drive over a cliff in your new car."
A dominant opinion among ISOs and MLSs was that regulation could quite possibly put them out of business. We predicted the feet on the street would not go down without a fight.
However, what the major card brands want, they usually get. So ISO regulation was imposed by the Associations on April 1, 1989. As with all challenges to current ways of doing business, many ISOs perished when they couldn't comply with the registration requirements and were cut off by their bank sponsors.
But the ISOs able to work within the newly imposed framework succeeded. One upside of registration was that the card companies raised interchange, which meant sales reps received increased residuals. Another positive was that ISOs got to pick the most talented sellers from the litter of laid-off salespeople.
By March 1993, the Bankcard Service Association (later to be known as the Electronic Transactions Association) reported that 261 ISOs had registered with Visa. With the decrease in the number of ISOs, and the increase in interchange rates, The Green Sheet concluded that the coming months were filled with opportunities for enterprising agents.
But, as we have seen lately in our financial crisis, lack of regulation and oversight leads unscrupulous business people to take advantage of the system. It is no different in the payments industry.
In February 1992, the Federal Trade Commission brought the first complaint against an ISO, alleging Certified Merchant Services Ltd. engaged in unfair and deceptive practices in regard to the marketing of card processing and other services to small merchants nationwide.
The FTC claimed CMS misrepresented the terms of – and then inserted fine print into – merchant account agreements, allowing CMS to fraudulently debit previously undisclosed fees from merchants' bank accounts.
"This complaint may be just the first shot across the bow of the bankcard industry, as the federal government begins to look closely at how ISOs in general and CMS in particular do business," we wrote.
Reining in those outlaw ISOs was in the air again. In 1994, BSA appealed for funding from payments industry businesses to start an ISO training and certification program. The BSA was the only trade association back then that was working with the card Associations to develop ISO certification rules.
The Green Sheet took the stand that certification was unnecessary and harmful to ISOs. Such a program would stifle the entrepreneurial spirit of salespeople and shackle them to a way of doing business that promoted mediocrity and stagnation.
We argued that sales reps thrive on the freedom to chart their own courses and stay ahead of the curve in terms of market trends and new technology. Good sellers are few and far between and would likely migrate to less bureaucratic industries to get the most out of their talents.
Furthermore, we believed the BSA considered ISO certification as a way to reduce the amount of problems inherent in ISO-merchant relationships. But we disagreed, claiming that ISOs and MLSs thrived on tackling problems and solving them.
In fact, the existence of problems doesn't necessarily mean businesses are in chaos, we argued. Rather, problems could mean businesses are growing and sales are high – in other words, that problems are the necessary byproduct of healthy businesses.
BSA's efforts to certify ISOs fizzled. Businesses in the payments industry were unwilling to pay for it.
In August 2008, ETA revived talk of ISO certification, unleashing an familiar mixture of outrage and acceptance from the feet on the street. As the old saying goes, As much as times change, they stay the same.
Depending on your point of view, progress toward a cashless society is either a sign of the ideal postmodern tomorrow or the augur of the impending evil of a one-world government.
To be sure, consumers are writing fewer personal checks today and using their debit cards more. Online bill pay and salaries loaded onto prepaid payroll cards are indeed pushing the world away from cash and toward electronic transactions.
But the process is slow … very slow.
In 1993, The Green Sheet published a watershed article entitled "The Cashless Society." Back then, as today, many believed a cashless society was right around the corner. The issue focused on the rise of debit cards.
Proponents were confident that, in the near future, consumers would be able to hop in their cars, fill up with gas, pay bridge tolls, park in metered lots, eat lunch at fast food restaurants, buy snacks from vending machines, and return home without taking one dollar or coin from their pockets.
As traditional "cash" transactions, such purchases were considered too small for check or credit card transactions. Instead, consumers would use their debit cards. Debit cards had been touted for years as the payment device that would lead the United States into a cashless society. But debit cards did not take off when they were first introduced in the late 1980s. In 1987, we reported that only 38,181 out of approximately 300,000 terminals nationwide were processing debit card transactions.
By 1989, it was estimated that check usage was still growing by 5 to 7 percent per year, despite the presence of debit cards. An American Banker survey said 43 percent of consumers polled would not use debit cards because it would eliminate the float associated with checks. And only 1.5 percent of retail POS transactions were initiated with debit cards.
"There's no advantage to the consumer with a debit card," said David Meyers, President of Payment Systems Education Association. "You still have to record the purchase in your ledger and you lose the float you get with checks."
By 1993, debit had still failed to gain a foothold as a consumer preference at the POS. In the prior 10 years, while debit supporters continued to predict the demise of checks, check usage continued to grow at more than 10 percent per year.
In October 1993, Visa unveiled its new advertising campaign. The debit card was renamed the "check" card. Visa's goal was to slash the number of checks written – 30 to 35 billion checks at that time – in half and convert the transactions to debit card transactions.
But it was becoming clear that debit cards functioned more as a cash replacement vehicle than as an alternative to checks.
That trend has continued to today. In a May 2008 article entitled "Lasso merchants with RDC," we reported checks still accounted for 33 percent of all noncash payments. Most corporate and business-to-business payments are still paper-based. Acording to the Federal Reserve, "although check volume is clearly on the decline, it will also likely have a long tail and need to be supported for many years to come."
Back in 1993, many believed debit cards would soon help recipients receive federal aid benefits, such as food stamps and Social Security payments. President Clinton's administration was pushing the use of smart debit cards to store individuals' medical records and authorize payment for health care services. "Trials could begin next year," we reported.
That's right. Smart cards were the next big thing back in 1993, just as they are today. Embedding cards with radio frequency identification computer chips, which rendered them contactless at the POS, was seen as new and innovative technology.
But there didn't seem to be much of a market for smart cards back then, because by July 1997, The Tower Group Inc. and the Centum Consultancy (then a part of VeriFone) were just making plans to form the Global Smart Card Advisory Service.
The international research and advisory program was designed to provide "competitive intelligence" to decision-makers at large financial institutions and retailers who would be in position to capitalize on the technology as "the smart card market grows."
But the advisory never took off. The Smart Card Alliance, however, which was formed in the early 1990s is the main proponent of smart cards to this day.
Fast forward to 1998 when The Green Sheet began to suspect an absence of interest in smart cards.
"Everywhere we look there are articles about smart cards and how we'll be using them to purchase items directly from the Net, with ease and convenience," we wrote. "The only problem is, no one seems to own one and, even if they did, there isn't anywhere to use it."
Lack of industry smart card standards was one obvious problem that delayed smart card implementation. But, more fundamentally, there weren't standards because there wasn't a consumer demand for smart cards. SCM Microsystems Inc., a smart card reader manufacturer, had made steps toward standardization by customizing its products to work with Microsoft Corp.'s Windows and Unix platforms.
Windows 98 and NT 5.0 operating systems were equipped with smart card standardization. But, even with these two efforts, manufacturers still believed it would be a few years before there was a substantial demand for contactless cards.
We're still waiting for contactless to take off. But smart cards may have finally found its niche in the United States to facilitate quick concessions purchases at sporting events and to enable transit fare cards.
The early 1990s witnessed the birth of the World Wide Web as a fast and efficient way to exchange information electronically. By the mid 1990s, the possibilities for doing business over the Internet were first being recognized. In July 1995, The Green Sheet made its foray into Web publishing. The next year saw ISOs utilizing cyberspace for payment processing services for the first time.
But, as e-commerce developed, thieves quickly began to take advantage of security vulnerabilities. In 1997, we reported less than half of one percent of all Web sites were secure; only half of those sites had strong encryption; and 94 percent of those businesses with strong encryption were North American companies – virtually the rest of the business world operated unsecure Web sites.
The increasing frequency of security breaches illustrated the hazard of storing sensitive cardholder data. Compromised data had the potential to destroy consumers' financial lives and cost the U.S. economy hundreds of millions, if not billions, of dollars annually.
In 2001, we reported that fraudsters had hacked software retailer Egghead.com servers and stole 3.7 million credit card numbers. Online music vendor CD Universe and Western Union Co. were also victims of hacks.
Then, in June 2005, a major data security breach was discovered at credit card processor CardSystems Solutions Inc. in which sensitive data for 40 million credit card accounts were stolen. As a result of the breach, Visa severed its association with CardSystems, a move quickly followed by AmEx.
That same month, Visa and MasterCard established the Payment Card Industry (PCI) Data Security Standard (DSS) – 12 security requirements to which all businesses that accept electronic transactions must adhere. In September 2006, the PCI Security Standards Council was established as the governing body for the PCI DSS. And then came the TJX Companies Inc. bombshell in late 2006. A level 1 retailer processing over 6 million transactions annually, Massachusetts-based TJX had nearly 100 million cards compromised, making it the largest data breach in U.S. history. The company was found to be noncompliant with PCI DSS.
Under PCI, if a breach occurs and the affected merchant is found noncompliant at the time of the breach, the merchant's acquirer might face fines from the card companies of tens of thousands of dollars. Further liability might include reimbursements of breach-related costs and class action lawsuits brought by cardholder victims.
But that wasn't the case for the Hannaford Brothers Co. breach revealed in February 2008. Hackers pilfered 4.2 million credit and debit card numbers from Hannaford's network. But the East Coast supermarket chain was PCI compliant.
So PCI DSS is not foolproof. The council is constantly evaluating its effectiveness. An update went into effect Oct. 1, 2008.
Yet still the breaches keep coming. The most recent large breach was at PCI compliant mortgage lender Countrywide Financial Corp. in September 2008, in which 2.2 million cards were compromised. But, unlike the TJX fiasco, this compromise was apparently an in-house job committed by a trusted executive – a breach that even the most robust security system may not thwart.
Though his name may be unfamiliar to many newbies, Paul H. Green has had a tremendous influence on shaping the payments industry and taking a stand for ISOs and MLSs at a time when the industry was largely controlled by banks. But, for those who have known him since the early days, his contributions will never be forgotten.
"I've known Paul for decades, and he's been an icon in this business for a long time," said Paul Martaus, President of Martaus & Associates. "We're both Vietnam vets and, to me, he is a true American hero. He flew unarmed rescue helicopter missions into blazing situations more times than you can count. He's the real deal, and my relationship with him is based on a thorough understanding of that whole milieu."
An honest resource
According to Martaus, Paul never lacked an opinion. When Paul started The Green Sheet in 1983, it was out of a desire to give accurate information about the industry and to be an honest resource for small ISOs and MLSs new to the business.
"That's what really started the whole Green Sheet idea," Martaus said. "He was the guy who took his passion and attitude and put it into print. The Green Sheet wasn't considered a viable media alternative because it wasn't deemed a true journalistic piece. But today, it has grown into such a positive source of information; I don't know anyone who doesn't read it."
A forum for all views
Bob Carr, founder and Chief Executive Officer of Heartland Payment Systems, was a contributing writer in the early days of The Green Sheet. "Paul was always good at letting people express their views, even if he didn't necessarily agree with all of them," Carr said. "He certainly didn't agree with all of mine, but he provided a forum for me to put out my point of view."
What impressed Carr about Paul when they first met in 1986 was his drive, his honesty and his willingness to take on the big players. "I was introduced to Paul when he was looking for another provider that he could hook up with and resell," Carr said. "It was obvious that he knew 100 times more about the business than I did. We were just getting started, and he already had a billion dollar portfolio."
Bob Ficarra, Vice President of Sales for Optio Solutions Inc., was always amazed at Paul's relentless drive to raise the industry standards. "That guy used to work 20 hours a day, seven days a week," Ficarra said. "We didn't have money for a direct sales force, so we decided to do a commissioned sales force. Then we started doing the ISOs, and The Green Sheet became the way to communicate with them.
"Everybody was a bunch of cowboys back then. There were legal problems, people getting sued, stealing residuals. It was disgusting, but we did well because we were honest. Most sales guys out there were just a bunch of yahoos. The Green Sheet became a newsletter to give the sales guy real information. Paul did things because it was right, not because it made him money. He was always the salmon swimming upstream."
But this trip down memory lane only scratches the surface of all the news and events The Green Sheet has witnessed and covered over the last quarter century. If the first 25 years overflowed with the ever changing landscape of the payments industry, with the rise and fall of businesses and technologies, with the cascade and turmoil of individuals in pursuit of the American Dream, then what will take place in the quarter century to come? We'll let you know in 25 years.
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