The Green Sheet Online Edition
December 28, 2009 • Issue 09:12:02
The payments sphere 2009:
Looking back, looking up
Historians may someday reflect upon 2009 and say it was the beginning of the decline of an ingrained American mindset: buy now, pay later. The extension of credit became widespread in the early 20th century, enabling working-class Americans to finance purchases of Henry Ford's Model T automobiles. But the practice, run amok, smacked into financial reality in 2008, when the economy sputtered almost to a halt.
With credit markets drying up and businesses and homeowners defaulting on loans, U.S. consumers opted to - or were forced to - forgo credit cards when making purchases and paying bills. Instead, they turned to debit cards.
As evidence of this change, Visa Inc. revealed in May 2009 that spending in 2008 with Visa debit cards in the United States had surpassed Visa credit card use for the first time in the card brand's almost 40-year history.
Reinforcing that the flow of credit might be plugged, Pulse network's 2009 Debit Issuer Study showed that overall debit transactions increased in the second half of 2008 by 8 percent, with the largest increase in PIN debit use. The study predicted that both PIN and signature debit would grow 7 percent in 2009.
Pin the tail on interchange
This sea change in consumer behavior was not the only factor affecting the payments industry in 2009. In May, The Green Sheet reported on the ramifications of the passage of H.R. 3221, The American Housing Rescue and Foreclosure Prevention Act of 2008. After decades of hovering on the payments industry's edge, the Internal Revenue Service is now intimately involved in our transactions.
Beginning with the 2010 calendar year, merchant acquirers, processors and ISOs must report to the IRS the transaction volumes of the merchants in their portfolios. Said data must be submitted early in 2011.
Never mind that H.R. 3221's substance has nothing to do with payments; it is designed to finance low-income housing as well as help first-time homebuyers purchase homes. In an era of diminishing tax revenues, the IRS covets the boon it considers to be revenues underreported by merchants.
And the government was not content to stop there. Also in May, President Obama signed into law the Credit Card Accountability Responsibility and Disclosure Act of 2009 (The Credit CARD Act). The law restricts interest rate hikes on existing card balances, limits certain fees, imposes new disclosure requirements and bans card issuance to minors without parental consent.
Card issuers are required to comply with the new law's provisions by February 2010. Acquirers, however, were largely spared in this type of legislation because lawmakers declined invitations to tinker with interchange, despite a push from retailer associations like the Merchants Payments Coalition and the National Retail Federation.
According to merchant organizations, interchange is deceptively applied by the card brands and becoming an increasingly oppressive expense for retailers.
The Electronic Transactions Association spearheaded the charge to educate Congress so lawmakers would not acquiesce to merchants' pleas to regulate what is, after all, the payments industry's lifeblood. The ETA made the case that interchange is being implemented responsibly and should be left alone by the federal government.
While it seems the ETA was successful in its campaign, the fight over interchange is far from over. In June, H.R. 2695, The Credit Card Fair Trade Act, was introduced in the House of Representatives. The proposed law would create a special exemption from anti-trust laws so retailers could negotiate "access" to electronic payment systems en masse.
Then, in September, convenience store franchise 7-Eleven Inc. delivered to Congress a petition signed by 1.66 million 7-Eleven customers that beseeched the federal government to regulate interchange.
MasterCard Worldwide countered with a survey that claimed 75 percent of consumers who initially supported 7-Eleven's position withdrew their support when they realized regulation would result in increased payment card fees for consumers.
In October, two more bills were added to the interchange assault. Like a piñata, interchange makes a sweet target; whether legislators ever get around to actually regulating it remains to be seen.
Eyes on prepaid
The prepaid card industry, which has become an ever more vital part of the payments industry, received the fixated gaze of Congress in the form of Title IV to The Credit CARD Act. Title IV, also known as the Fair Gift Card Act, was intended to protect U.S. consumers from "unreasonable" fees and expiration dates that drain value from gift cards.
However, critics of the Act, represented by the Network Branded Prepaid Card Association, argued that lumping open-loop, network-branded cards in with the closed-loop, private-label variety would be a mistake.
According to the NBPCA, issuers of closed-loop cards earn revenues on the underlying sales of products and services purchased with the cards, while issuers of open-loop cards are actually providing a service - the ability to use the cards at millions of locations nationwide - which cannot be provided without charging fees for their use.
Luckily for open-loop card providers, the amendment was modified to the satisfaction of its opponents before President Obama signed The Credit CARD Act into law.
But senators and representatives in Congress are not the only ones who have drawn a bead on the prepaid card industry. Issuer and processor RBS WorldPay Inc., the U.S. arm of The Royal Bank of Scotland Group, reported in late December 2008 that its network had been hacked, resulting in the possible compromise of data from approximately 1.5 million prepaid cardholders.
In January 2009, RBS was hit with a class action lawsuit on behalf of victims of the breach. In February, it was reported that 100 prepaid payroll card numbers from that breach were used in a coordinated, global ATM scam that netted fraudsters between $9 and $10 million in only 24-hours.
In March, Visa revoked RBS' compliance status with the Payment Card Industry (PCI) Data Security Standard (DSS). In November, a federal grand jury in Atlanta indicted four Eastern European men, the apparent masterminds of the breach.
On fraud and infamy
Ah, yes, the breaches. Unfortunately, 2009 had a bumper crop; the nonprofit consumer advocacy Privacy Rights Clearinghouse documented well over 200. And the consequences are great. A May report in The Green Sheet detailed how electronic payment card fraud sometimes helps fund violent terrorist schemes, such as the 2004 Madrid train bombings and the 2005 London subway system attack.
One serious breach involved Heartland Payment Systems Inc., among the largest processors in the United States. The breach occurred in 2008 but was made public in January 2009. The size of the compromise is still unknown, but Heartland processes 11 million transactions a day for approximately 250,000 merchants.
However, Heartland said no merchant data or cardholder Social Security numbers, unencrypted PINs, addresses or telephone numbers were stolen. Nevertheless, the breach had significant repercussions for Heartland and the entire industry. In March, Visa delisted Heartland from PCI DSS compliancy, but the processor returned to Visa's good standing in May.
The breach and its aftermath spurred Robert O. Carr, Heartland's Chairman and Chief Executive Officer, to found the Payments Processor Information Sharing Council, under the aegis of the Financial Services Information Sharing Council. The goal of the PPISC is for acquirers and processors to share information about data security breaches to prevent future attacks.
Another community of payment players heralded a new security alliance at the Electronic Transactions Association's Annual Meeting & Expo held in Las Vegas in April. The big three POS terminal manufacturers - Ingenico, Hypercom Corp. and VeriFone - formed the Secure POS Vendor Alliance to generate best practices and bring consistency to security standards.
Given the in-fighting that has often plagued the payments space, this spirit of cooperation could not last long, and it didn't. In September, a feud erupted between VeriFone and Heartland, which had recently joined the SPVA. At issue was end-to-end encryption technology - one highly touted security solution.
In a lawsuit, VeriFone alleged Heartland had stolen one of the POS vendor's patents. Heartland countered that VeriFone was attempting to sabotage Heartland's efforts to bring end-to-end encryption to market and undermine Heartland's standing with its own merchants. The very public dispute resulted in VeriFone's decision to sever its POS terminal support relationships with Heartland by year's end.
This acrimony between two of the most respected and successful companies in the industry highlights that 2009 has been an exceedingly difficult year. With the U.S. and world economies in recession, double-digit unemployment affecting just about every job sector, and businesses struggling to survive or going under, companies are under enormous pressure.
This phenomenon is no more evident than in the case of Cynergy Data LLC. The prominent processor filed for Chapter 11 bankruptcy in September, setting off a wave of distress among its sales force and in the larger payments community. Payment attorney Adam Atlas called the bankruptcy the industry's "most difficult moment" since the security breach that rocked processor CardSystems Solutions Inc. in 2005.
The same questions asked about CardSystems back then were now being asked about Cynergy: Would the company be unable to pay residuals? Would it collapse and bring down its network of ISOs?
Cynergy reassured the industry that neither scenario would occur. The October purchase of Cynergy by private investment firm The ComVest Group for $81 million reportedly positioned Cynergy to go forward with a lower cost structure and debt burden, and with an influx of $35 million in capital from ComVest.
In awarding the purchase to ComVest, the bankruptcy court noted that the firm had made a commitment not to break up and sell off Cynergy, but instead to expand the company, including its sales force. Additionally, ComVest would honor all of Cynergy's merchant and ISO agreements.
As of this writing, Cynergy's reorganization seems to be an example of how the individuals and institutions involved recognized the bigger picture and made decisions that brought order and stability to a process that could have slid into chaos in less capable hands. That realization perhaps makes the Cynergy saga a patch of sunlight in a predominantly overcast financial year.
On top of the world
Indeed, 2009 is a year many payment professionals would just as soon forget. Revenues were down; a multitude of banks closed; many ISOs and retailers went belly up. But the industry carries on, with businesses launching new products, partnering with or acquiring other businesses, and realigning for national and international expansion.
It is a time of rapid change, much as it was at the beginning of the 20th century. When the Ford Model T revolutionized travel for average Americans, a similar expansion was occurring in the skies. The aviation industry was just spreading its wings. For those who could afford it, the private airplane symbolized a new level of freedom and opportunity. Soon, daredevils were barnstorming the country in bi-planes and crossing the Atlantic.
Fast forward to April 2009: Jared Isaacman, Chief Executive Officer at United Bank Card Inc., broke the record for circumnavigating the globe in his Cessna Citation CJ2. He traveled 22,893 miles in 61 hours, 51 minutes and 15 seconds. The flight (combined with proceeds from a failed attempt to break the record in 2008) raised almost $90,000 for the Make-A-Wish Foundation of New Jersey.
It is fitting that Isaacman accomplished the feat, for the industry's high-fliers always lead the way. They recognize the risks of any endeavor but are determined to reach their goals, despite adversity. 2009 was a challenging year. 2010 may be just as tough, if not tougher. Perhaps that should inspire the motto for the coming year: Keep your nose up; stay the course. And don't dwell on what lies below.
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