By Ken Musante
Napa Payments and Consulting
My first job out of college was with Wells Fargo Bank’s issuing division. It was 1989, six years after The Green Sheet's launch. Decades later, GS, the industry and I have come a long way.I'm honored to contribute to this retrospective series celebrating this publication's 40th year.
When my career began, many merchants submitted physical drafts to their acquirers. Before manually imprinting a transaction, which was then physically brought to the bank, the merchant checked the weekly Warning Bulletin for any transaction over the floor limit. The Warning Bulletin was about as thick as three laptop computers and contained lost or stolen card numbers. If a card was on the bulletin, and the merchant failed to cross reference it at the POS, the issuer could chargeback the transaction.
This expensive, laborious, error-filled acceptance process gave rise to the electronic data capture (EDC) terminal. Initially, many EDC terminals would authorize (circumventing the need to check the Warning Bulletin) but still required depositing a paper draft at the local bank.
In the early '90s, Visa and Mastercard were not-for-profit Associations owned by their member banks. The card networks implemented incentive interchange to provide preferential interchange for electronically submitted transactions. This led to an interchange schedule, and the number of categories grew to five. Pricing migrated from a single rate to a lower priced, three-tier structure of Qualified, Mid-Qualified and Non-Qualified.
Throughout the '90s, when the number of interchange categories expanded and the structure became more complex—with differentiation for signature debit, rewards and commercial card transactions—acquirers and processors had to determine which tier each new interchange category would fall. Three-tier pricing allowed for conversion from manually imprinted card acceptance to the EDC terminals because magnetic stripe transactions were less expensive. The floor limit on these transactions was zero, and the Warning Bulletin became irrelevant.
Bank executives and their sales teams were accustomed to receiving referrals and accepting applications from willing merchants. Thus, they had little to no clue how to sell payment card acceptance services and POS terminals. So they looked to independent sales organizations (ISOs) to assist in distributing terminals.
Subsequently, some unscrupulous actors gave the card networks a black eye, so the networks codified the ISOs’ place as sponsored entities and delineated which responsibilities may be delegated to a third party. Initially, ISOs did not receive residuals. They leased the simplistic Verifone Zon Jr and the deluxe Zon Jr XL to merchants at punishingly high lease factors.
In 1993, I departed Wells Fargo for Humboldt Bank, a small regional northwest bank, to start the merchant services division. I secured from Visa a bank identification number (BIN) and from Mastercard an Interbank Card Association (ICA) number and provisioned them to First Data Corp. Cardservice International, a prominent ISO founded by Chuck Burtzeloff, was our first client, and we set up a sponsor relationship with Humboldt earning 15 basis points (0.15 percent) on all volume processed.
The term "rent-a-BIN" commonly refers to an ISO utilizing a bank’s BIN and ICA while making most of the risk, service and pricing decisions on the bank’s behalf. Because CSI pressured us to lower our sponsorship fee, we sought alternative sponsor customers and began directly sourcing merchants in and around our branch network. The irony is we were still making double-digit bps, which is many times higher than today’s going rate.
National Bank of the Redwoods (purchased by WestAmerica in 2005) introduced me to CreditCards.com, which later became Electronic Card Systems. ECS became our second sponsored ISO. Not only did we sponsor ECS, but we also performed back-office functions such as merchant adjudication, monitoring and chargeback processing. We were able to significantly increase our share of the income by taking on a greater share of the services and venturing further out on the risk scale.
During much of the '90s, high-risk merchant chargebacks were running in the mid to high single digit percentages. When Humboldt Merchant Services began accepting high-risk merchants, the card networks implemented a chargeback to a sales threshold of 3 percent. While this number seems enormous by today’s standards, it was a painful transition for many merchants.
Consolidation was as much a part of the industry then as it is today. In 1996, Roger Pierce left Visa to join First Data and was going to consolidate the many First Data platforms onto First Data North or CES. The Omaha authorization platform was to be decommissioned, and all clients would be serviced in an alliance model where First Data managed nearly all aspects of merchant services for its banking clients.
Clients revolted. First Data serviced many of the large ISOs of the day, and they would not turn over their servicing to a corporate entity and have their portfolios managed like a bank portfolio. Omaha remains a relic, and its legacy tech stack is expensive to maintain. But its functionality and real-time fraud capabilities were a necessary tool for many risk-seeking acquirers and ISOs during the mid to late '90s.
Back then, each chargeback notice came to the bank in an individual orange letter. The post office loved us. We were single-handedly responsible for half the mail in Eureka, Calif., and each envelope had my name on it. One day, I went to the post office to pick up a certified envelope. I gave my name to the clerk. Her eyes went wide. She had a smile only a postal employee could muster. “You get ALL the mail!” she yelled with excitement. I never returned to the post office.
During this time, Visa saw little benefit from small banks, Humboldt Bank and Bank of Oakland, for example, running an acquiring operation. Visa viewed small banks, especially banks accepting non-traditional merchants, as greater risk—and with no measurable additional revenue. Visa was implementing a matrix that limited acquiring volume based on the acquirer’s volume, capital, chargeback threshold and card entry method. Had the plan been implemented, Humboldt Bank would not have been able to continue on our growth trajectory. The Bank of Oakland’s acquiring manager, Tim Jochner, and I formed the Bankcard Acquirer’s Rules Committee (BARC) and solicited other small banks to petition Visa to modify its pending implementation of the matrix. To my surprise, it worked, and Visa backed off. Stay tuned for the next installment of "Payments, a retrospective: One professional's journey."
As founder of Humboldt Merchant Services, co-founder of Eureka Payments, and a former executive for such payments innovators as WePay, a division of JPMorgan Chase, Ken Musante has experience in all aspects of successful ISO building. He currently provides consulting services and expert witness testimony as founder of Napa Payments and Consulting, www.napapaymentsandconsulting.com. Contact him at email@example.com 707-601-7656 or www.linkedin.com/in/ken-musante-us.
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