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The Green Sheet Online Edition

November 10, 2008 • Issue 08:11:01

Give ACH a chance

By Biff Matthews
Cardware International

Attacks on interchange are intensifying from all sides: merchants, retail organizations, and federal and state regulatory entities. To borrow a phrase from CNN pundit Jack Cafferty, "It's getting ugly out there." Clearly, all parties agree that the "this is how we do it" philosophy no longer justifies interchange fees. Several of the original reasons for interchange - the 30-day float comes to mind - no longer exist.

Reasons that might otherwise be valid are contradicted by wildly inconsistent talking points. Example: "Interchange helps to cover losses from fraud, which are growing." In fact, legislators and the merchant public receive highly conflicting reports about whether fraud losses are increasing.

The one thing we all know is interchange is a profit maker for issuers, and little, if anything, more than that. As they say, nice work if you can get it.

In my opinion, there is no good reason why merchants should be forced to fund reward programs. This should be the responsibility of the cardholders or banks - or both. The only reason issuers - and by default Visa Inc. and MasterCard Worldwide - charge merchants interchange is that they can.

Enter ACH

Employing the automated clearing house at the POS results in a considerably lower fixed-cost-per-transaction alternative. Check cards issued by the card networks are a step in that direction. But, to date, check cards continue to have credit card fees and interchange attached to them. The rationale behind interchange does not hold water relative to check cards.

One way for integrating ACH is through POS terminals. Like checks, ACH transactions are processed at a fixed cost. But that cost is actually less than checks today, more in line with check processing 20 years ago.

But several barriers have prevented ACH payments at the POS from gaining traction.

Which came first?

One hurdle is the chicken versus egg scenario between cardholders and merchants: Which comes on board first?

Cardholders have no power to force change in the status quo without the help of merchants. One excellent example of this dynamic occurred when Discover Financial Services rolled out the Discover card. It took strong simultaneous actions between cardholders wanting the cards and merchants accepting the cards for the Discover card to take off.

But to launch the Discover card and make it thrive required deep financial pockets. Today, Revolution Money Inc.'s RevolutionCard and Tempo Payments Inc.'s Tempo Debit card have the systems in place and, if capitalized properly, could pull off a Discover-like implementation.

Tempo Debit, for example, is a stand-alone, decoupled debit card. Transactions using this card are settled through the ACH.

In May 2007, Capital One Financial Corp. took a failed stab at ACH at the POS with its decoupled debit card, where payments bypassed bankcard networks for settlement through the ACH.

Explanations for its demise have never been credible to me. One reads that it was a pilot program, information was collected and then it was discontinued. But I believe there is more to it.


An additional hurdle is the lack of credit overdraft protection linked to the ACH. Without it, too many ACH transactions are declined at the POS.

There's also a quandary concerning "post-consumption" transactions, such as those that occur in restaurants. It needs to be determined whether cardholders lack overdraft protection or are approaching spending limits. Cash availability must be confirmed at the POS.


Payment responsibility, of course, is a third concern. Because the ACH network provides consumers direct access to cash, it has to be a PIN-based system, not signature-based. In my view, cardholders making ACH payments must therefore bear the burden of knowing they have the funds available for purchases, unlike when consumers use credit cards. Cardholders using the ACH cannot have "zero liability," as it is with credit.

Consequently, cardholders should handle ACH-enabled cards as they should their checkbooks - responsibly.

The underserved

A fourth barrier is how to provide the benefits of the ACH to the unbanked.

Like Western Union Co. and similar money transfer companies, the ACH offers an opportunity for a quasi-regulated, managed monetary system outside the banks. Non-U.S. citizens are justifiably leery of banks, because banks charge high fees for services. That needs to change.

Electronic payments have lowered overhead costs for financial institutions, but fee structures are still based on antiquated, paper-based models. The ACH must be managed and regulated so customers have assurances their money is safe and not being fee'd to death.

Although the term unbanked may be misleading, making those categorized as such appear to be a monolithic consumer segment, ACH payments could thrive in ethnic and minority communities across the United States.

Middle Eastern or Asian communities that gravitate to alternative banking systems (known as hundi or hawala systems in Arabic and fei chien in Chinese) see huge benefits to having cards that function as cash.

This underground, or perhaps better termed secondary economy, is clearly here to stay. Official estimates as to its size range from 20 percent to 30 percent of the gross national product.

It would hardly be surprising if it grew further in light of the 2008 meltdown of the primary economy. So, let's acknowledge it and create ways to work with it, improve it and make money from it.

ISOs and the ACH

So how can ISOs and merchant level salespeople (MLSs) benefit from ACH use at the POS? If you are considered a trusted outsider working with underserved ethnic communities, you understand their needs and help to provide them with alternative financial services and support, there's a huge opportunity.

To serve participants in this secondary economy means to improve merchants' bottom lines and broaden consumers' payment options, with the goal of bringing both parties into the payments mainstream.

But it must be done gradually, taking into account issues of financial anonymity, regulation and trust (or mistrust) of financial institutions.

The way to reach this goal may lie outside the sphere of the traditional card networks.

The solution may come in the form of a hybrid to the existing monetary system, or it may come as a spin-off (or evolution) of the official banking system.

However it plays out, the increasing use of alternative electronic payments will reduce costs for merchants and give cardholders a wider use of financial products and services.

The future

Limited payment options are an obstacle for many groups, but the larger challenge the payments industry faces is reducing transaction processing costs.

Paying 2.5 percent of the face value of the transaction is an enormous burden. And that percentage rises for reward card, MO/TO and Internet transactions. ACH payments lower processing costs and allow merchants to serve a larger portion of the buying public. When ISOs and MLSs facilitate solutions and merchants ring up additional sales, everyone is happy.

Will full ACH integration at the POS ever be realized? It's anyone's guess. But I have higher hopes for ACH than I do for chip and PIN technology because ACH leverages tools and networks already in place.

I believe ACH use has substantial recurring benefits for virtually everyone along the payments industry value chain. end of article

Biff Matthews is President of Thirteen Inc., the parent company of CardWare International, based in Heath, Ohio. He is one of 12 founding members of the Electronic Transactions Association, serving on its board, advisory board and committees. Call him at 740-522-2150, or e-mail him at biff@13-inc.com.

The Green Sheet Inc. is now a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals. Click here for more information.

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