The Green Sheet Online Edition
December 22, 2008 • Issue 08:12:02
2008: Keeping it sticky
Chess is a game of strategy and patience: Scan the board, see the positions of the pawns, the rooks, the bishops, the knights, the kings and the queens - both yours and your opponent's. Then imagine where those pieces will be three, four, five steps ahead. Once the future is mapped out, make your move.
The payments industry is no different. The game is played on a giant, amorphous board called the marketplace. Instead of chess pieces, players maneuver products and services, new technologies and new solutions. As in chess, the goal is to win.
The stakes are high in this game. Livelihoods are in the balance. Fortunes can be won or lost. ISOs and merchant level salespeople (MLSs) know full well that winning means increasing revenue by boarding new merchants and retaining them by providing superior service and support.
As the economic downturn gained momentum in 2008, maintaining merchant stickiness became the dominant strategy and will likely remain so for some time to come. This year-in-review traces how the year played out and gives a glimpse of what the game may entail for ISOs and MLSs in 2009.
When Visa Inc. debuted on the New York Stock Exchange on March 19, it became the largest initial public offering in history, raking in $17.9 billion. Visa sold 406 million shares at $44 per share.
Other titans in the industry made big moves, too. After jointly operating Chase Paymentech Solutions LLC for 12 years, First Data Corp and JPMorgan Chase & Co. divided up the mega-acquirer, which had processed approximately 19.7 billion transactions in 2007.
Fifty-one percent of Chase Paymentech's assets, most of its employees and its Canadian and European operations went to JPMC, while First Data absorbed 49 percent of the assets and a portion of its remaining employees, including Chase Paymentech's full-service ISO and agent bank unit. The breakup reportedly allowed the companies to focus more on their core businesses and future strategies.
Another shift in the payments space also came in March when biometric technology company Pay By Touch went belly up. Biometrics facilitates the identification of individuals via unique physical characteristics, such as fingerprints or iris scans.
Pay By Touch's biometric finger scan devices, which were installed in 2,400 locations in the United States, enabled consumers to pay for goods and services at the POS. But a combination of managerial problems and consumer and merchant reticence about biometric technology doomed the company.
But biometrics is not dead. The technology may be ideal for verifying identities for contactless mobile phone payments. Japan is ahead of the United States with adoption of mobile payments. Many industry insiders believe paying with handheld devices will inevitably catch on in the States.
Pay By Touch is not alone, however, in feeling the turbulence of 2008. It has been a year of economic uncertainty and upheaval that has left no one untouched.
With the subprime mortgage collapse; bank failures; a volatile oil market in which gas prices spike to record highs, then dip; unemployment rates soaring; and large companies downsizing, going to the highest bidder or just going away; it's been a scary time indeed.
As of early December, 23 banks failed in 2008. In comparison, there were only three failures in 2007 and none in 2006 or 2005. Eleven banks failed in 2002, which coincided with the economic fallout from 9/11.
One of the 23 banks that failed in 2008 was First Bank of Nevada, the sponsor bank of Humboldt Merchant Services, a Eureka, Calif.-based processor. Soon thereafter, Moneris U.S., a wholly owned subsidiary of Canada's largest processor, Moneris Solutions Inc., acquired HMS.
In April, Frontier Airlines filed Chapter 11 bankruptcy to protect itself against an action taken by its processor, First Data. The steep cost of fuel, along with other market factors, had already put several airlines out of business. Fearing Frontier Airlines might follow, First Data threatened to increase its holdbacks - amounts withheld by the processor from proceeds on ticket sales - from 45 percent to 50 percent, and then to double that percentage soon after.
Every year seems to be a banner year for legal actions in the payments industry, and 2008 had its share. In October, Visa settled its four-year antitrust lawsuit with Discover Financial Services.
In 2004, the U.S. Department of Justice ruled that the policies of Visa and MasterCard Worldwide violated antitrust laws when they prevented banks that issued Visa- or MasterCard-branded cards from issuing Discover cards.
That ruling paved the way for Discover to sue the two largest card companies for almost $6 billion and then settle for $2.75 billion - $1.8875 billion from Visa and the rest from MasterCard.
Another ruling could have had a stifling affect on the growing merchant cash advance industry, had it gone in favor of AdvanceMe Inc. In May, the U.S. Court of Appeals for the Federal Circuit in Washington, D.C., rejected AdvanceMe's appeal.
Cash advance provider AdvanceMe filed the appeal after its lawsuit against six rival companies was defeated. The lawsuit alleged that competitors were illegally using AdvanceMe's patented method, which enables merchants to repay cash advances through credit and debit card receivables processing.
The U.S. District Court in Texas ruled in August 2007, that - yes - the patent was violated but that the patent should never have been issued in the first place.
The May 2008 ruling may have put the final kibosh on AdvanceMe's claims when Judge Leonard Davis stated the patent "inventor" did not invent a new business method but rather "built on long-established prior art" packaged and marketed in a new way.
2008 has also been a year of legislation. Never before has the payments space been under such scrutiny.
Security issues were addressed in two amendments to the Fair and Accurate Credit Transaction Act (FACTA) that went into effect Jan. 1, 2008.
One of the amendments called the FACTA Identity Theft Red Flags Rule requires bankcard issuers to establish guidelines that flag and deter potential instances of identity theft. The compliance deadline for that amendment was Nov. 1, 2008.
But what businesses actually must comply is under question. So the deadline was extended to May 2009 to give businesses time to figure that out.
Overseas, the European Commission determined in December 2007 that certain MasterCard credit and debit card interchange rates violated EC rules. But the EC is not alone; similar decisions have been reached in Australia and other countries.
In October 2008, MasterCard Europe introduced a new interchange fee structure for merchant acquirers.
But EuroCommerce, the governing body representing the retail, wholesale and international trade sectors in Europe, said MasterCard increased its interchange fees 160 percent, which, according to the EC, violates the 2007 ruling. The EC and EuroCommerce have not yet reached a final decision on how to proceed with MasterCard this time around.
But interchange has always been a testy subject, especially for the merchants who pay it.
The card brands and their member banks charge interchange to retailers whenever consumers use credit or debit cards; up to $2 out of every $100 spent goes to interchange.
Interchange rates in the United States became an issue of fierce debate in 2008 as merchant organizations clamored for more control, claiming the interchange fees are exorbitant and arbitrary.
U.S. congressmen spoke out about what they claimed is an unfair system for determining credit card interchange fees and accused Visa and MasterCard of abusing their market power.
In consequence, the Credit Card Fair Fee Act (HR 5546) was introduced into the House Judiciary Committee in March. If passed and signed into law by the president, the law would enable merchants to negotiate interchange fees directly with banks or acquirers.
If merchants and the card companies fail to agree on rates, the U.S. Department of Justice's Antitrust Division would arbitrate the rate. HR 5546 passed the committee in July and was placed on the House calendar of business to be taken up sometime in the future.
A Senate companion bill (SB 3086) was put forth in June. Analysts on both sides don't expect the bills to pass any time soon, perhaps not for years.
But the American Housing Rescue and Foreclosure Prevention Act (HR 3221) was passed into law in July. Embedded in it is a provision requiring acquirers and third-party settlement organizations to report their merchant credit and debit card transactions to the Internal Revenue Service.
The law goes into effect Dec. 31, 2010, and will require industrywide application upgrades to handle the new reporting requirements.
Like Congress, the Federal Trade Commission flexed its muscles in 2008. In March, the FTC settled charges against TJX Companies Inc. Back in 2007, TJX experienced the largest data security breach in U.S. history.
The FTC's complaint alleged TJX's security practices violated provisions of the FTC Act of 1914 and failed to employ reasonable and appropriate security measures to protect sensitive consumer information on its networks.
In the prepaid sphere, the FTC brought a lawsuit against several East Coast prepaid long distance phone card providers. The FTC claimed the companies engaged in deceptive advertising practices that potentially defrauded consumers of millions of dollars.
A U.S. District Court sided with the FTC in June. The fallout from this lawsuit and others may bring greater regulatory oversight to the prepaid calling card industry.
The topic of the Payment Card Industry (PCI) Data Security Standard (DSS) flooded the industry and, likewise, the pages of The Green Sheet.
The PCI Security Standards Council (SSC), the managing body for the PCI DSS, introduced PCI DSS version 1.2, which took effect Oct. 1, 2008. According to the council, the changes clarify and further explain the 12 requirements of the PCI DSS.
The new version is also designed to eliminate redundancies in the requirements, consolidate the rules for protecting cardholder data and improve reporting.
To help with the PCI PIN Entry Device Security Requirements and the Payment Application (PA) DSS, the Self Assessment Questionnaire (SAQ) got an overhaul this year as well. The SAQ assists merchants in recognizing the steps merchants must take to gain and maintain PCI DSS compliance.
For small and mid-size merchants, the SAQ is intended to ease the compliance process and act as a substitute for businesses that do not need to have on-site PCI compliance assessments.
While the alphabet soup of acronyms and requirements may give ISOs, MLSs and merchants headaches, making data security systems harder for fraudsters to penetrate is serious business. Security breaches have become an all-too-common occurrence in 2008.
The increased security regulations and requirements have heightened awareness of the problem and promoted involvement and understanding for every player along the payments industry value chain.
An indication that the word is getting out is the increased attendance at the PCI SSC's second annual community meeting held in September.
The council reported attendance by industry leaders was up 71 percent over 2007.
Despite the rocky economy and a proliferation of glum forebodings, 2008 was a year marked by significant achievements for The Green Sheet Inc.
Most important, The Green Sheet marked its 25th anniversary in October with a retrospective cover story tracing the history of the payments industry and the role ISOs and MLSs have played in shaping it.
The magazine has come a long way since starting out as a four-page newsletter published by Paul Green back in 1983. On March 17, 2008, it launched Selling Prepaid.com, a Web site devoted to the growing prepaid sector of the payments industry.
In only nine months' time, Selling Prepaid is becoming a valuable resource for ISOs and MLSs in offering prepaid products to merchants. The Web site includes a newswire, e-magazine, forum, resource guide and event calendar.
In addition, The Green Sheet was honored with four Apex Awards this year. We won in the Feature Writing category for "Learning the ISO Lingo"; in the Design and Layout category for our GSQ v10n4 "Play Ball: 2007 Acquirers Report"; and in the Writing and Content category for our Web site, GS Online, found www.greensheet.com. Finally, our Inspiration series won the Grand Award for Writing.
The Apex judges said this about the Inspiration series: "These columns offer what the department heading says - inspiration. Warm, inviting and down-to-earth writing couches the theme for each column, as the author effectively applies the themes and observations of everyday living to methods for dealing with business issues in the industry. Done with finesse."
Over the past year, the thorny subject of interchange was ubiquitous in The Green Sheet. Entering "interchange" in the Fast Finder search engine on GS Online brings up almost one hundred results for 2008 alone.
For example, Visa capped interchange rates for its debit and prepaid fuel transactions in July.
The restructured interchange fees at the pump took effect in October. Ideally, the lowering of interchange would save petroleum retailers money, and the savings would, in turn, be passed on to consumers.
But petroleum merchants reportedly have to jump through hoops to qualify for and then implement the new rate, so the benefits remain elusive.
Thankfully, interchange is not the only topic The Green Sheet covers.
As a resource for ISOs and MLSs, one of our main goals is to give sellers actionable intelligence on what products and services may increase their revenues and help retain merchants. Four of the most featured value added services in 2008 were cash advance, remote deposit capture (RDC), dynamic currency conversion (DCC) and prepaid cards.
The Green Sheet ran six articles on cash advance in 2008 and mentioned it in many others. Cash advance has grown tremendously in the past couple of years, with a big surge since AdvanceMe lost its appeal in May. The North American Merchant Advance Association was formed that same month.
Cash advance provides merchants with capital against future credit card, debit card (and now even check) receivables. A percentage of merchants' daily card revenues goes directly to cash advance providers.
While payback percentages may be steep, merchants get funding fast and all parties avoid regulations associated with loans.
Furthermore, because repayment is directly tied to merchant sales, debt is not as burdensome to repay in lean times as loan payments would be.
RDC is a Web-based electronic payment processing system that converts paper checks into electronic transmissions. RDC saves merchants trips to banks, consolidates payment processing under single providers and gives merchants faster clearing through the automated clearing house. RDC transactions are also cheaper to process than credit cards, which can reduce costs for mom and pops already experiencing slim margins.
With DCC, when foreign visitors to the United States pay at the POS, cardholders see transaction amounts in their home currencies. In the present economy, with the dollar weak in comparison to foreign currencies, travelers will increasingly buy things from U.S. retailers.
To be able to see the value of those transactions in home currencies makes DCC an enticement for foreigners to shop in businesses that offer DCC and a reason for ISOs and MLSs to propose it as a value add to merchants.
Prepaid card programs are another value add to attract new merchant accounts and retain existing ones.
As the economy worsens, more and more individuals will join the ranks of the unbanked and underbanked. When credit is unavailable and checking and savings accounts are too expensive to maintain, prepaid cards can fill that payment void.
Since consumers will increasingly gravitate to gift, payroll and general purpose reloadable prepaid cards, ISOs and MLSs might want to sell programs that support them to merchants and other businesses.
Other good news in the prepaid sphere came in November when the Federal Deposit Insurance Corp. decided to insure bank-issued open loop gift cards up to $250,000.
This move will increase consumer confidence in these products, making them an easier sell. Many are hopeful the FTC will follow suit with protection for consumers holding closed loop, merchant-issued gift cards.
To say the least, 2008 has been one wild game of chess. The pieces are constantly being moved across the board. Some pieces have been knocked off, others have been cornered, while others seem to have a direct path to capturing the queen.
But that's where the chess analogy breaks down. There is no final victory in the payments game, where a player can proclaim checkmate and the game ends.
The game is forever changing, forever ongoing. We touched on this aspect in "Payments technology twists, turns, surprises" (The Green Sheet, April 14, 2008, issue 08:04:01) which gave a brief history of technology that supports or impacts the payments sphere.
Since technological innovation drives our industry, it is consistently surprising to see which technologies catch on and which ones fail in the marketplace.
In 2008, we reported on Visa research that claims credit card transaction times at the POS are 20 percent to 25 percent faster than those for cash transactions, and contactless, smart card transactions are faster still - 53 percent faster than credit cards.
Furthermore, MasterCard findings show paying with contactless cards cuts 12 to 18 seconds off the standard credit card transaction time.
And, still, contactless has not yet taken off in the United States. But you can bet some other technology will, maybe something that is working its way up to public consciousness right now or perhaps something that hasn't been invented yet.
In The Green Sheet, Aug. 25, 2008, issue 08:08:02, we asked our advisory board members, how is your business handling the economic hardships that accompany a downturn?
Jared Isaacman, founder and CEO of United Bank Card Inc. said, "I believe hard times promote innovation, creativity and determination. When things are going great there is no reason to find room for improvement."
Douglas Mack, President of Card Payment Systems Inc., added, "I know of no other business that offers the type of reward we get for the effort we put forth. Period. Let's focus on how to make our industry better, not the same tired issues all the rest of the media are feeding on."
Armed with the lessons of 2008, payment professionals can tweak sales strategies for 2009. As in chess, it's all about planning several moves ahead. Then, when the right opportunity arises, it's a matter of taking action and regrouping as opposing forces make their moves. Let the tournament continue.
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