The Green Sheet Online Edition
May 23, 2011 • Issue 11:05:02
Views on regulation and registration
The collective eye of the federal government has finally turned toward the payments industry because merchants got its collective ear. Large, determined and well organized merchant advocacy groups successfully lobbied legislators on Capitol Hill to make card processing a hot-button topic.
The outcome of that combined lobbying effort resulted in passage of the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the details of which show just how far reaching this new level of federal scrutiny can be.
New initiatives to stave off further legislative incursions into the payments sphere are being promulgated by the industry - from the Electronic Transactions Association's recently launched ISO certification program to ideas circulating about agent registration.
It is clear the time is right for the industry, as a whole, to step up efforts to police itself. Otherwise, the feds will, with potentially damaging repercussions for the economic health and well being of payments.
With that in mind, we asked members of our advisory board the following questions:
- Are reputational problems within our industry primarily due to the actions of rogue agents, or are they more systemic in nature? In either case, who or what needs to change for the better?
- What type of oversight do you think would be appropriate, and who should do it?
- Who needs to be certified and/or registered? And why?
- Are there programs currently in place that may help with self policing efforts?
Attorney at Law
- The reputational issues in our industry flow from dishonesty and greed. However, these weaknesses are amplified in our industry because businesses give an individual so much power to steal on a grand scale. I think that there is a kind of natural selection that goes on within the industry whereby dishonest players are weeded out, although some do have remarkable staying power.
I am against greater government regulation because that will interfere with pricing and competition, which is necessary for our business to thrive. I think ISOs and agents, over the long run, have the choice to behave in an ethical manner and place their merchants with honest processors.
If their processor or super ISO is gauging merchants, it's just a question of time before it does the same to its ISOs and agents. In this sense, it is worthwhile being wary of successful processors.
- I would be in favor of some additional oversight as it relates to the honesty of sales organizations, but I would be against any regulation of pricing as that could put an end to a number of the participants in our industry.
- Registered ISOs should be registered with the associations, as they are now required to do. I think ISOs should police their agents; creating a government or industry licensing bureau is a layer of bureaucracy and potential corruption that is perhaps not necessary.
- Indeed, various industry associations have drafted and discussed ethical codes, but none have become mandatory.
United Bankcard Inc.
- I believe the bulk of the reputational issues this industry faces are a result of the rates and fees we charge and the subsequent merchant dissatisfaction. There is no single source for these problems as it exists on virtually all levels. If you start from the top, Visa and MasterCard have made the interchange rates incredibly complicated and extremely volatile.
The most significant changes to a merchant's pricing happen once or twice a year and these are almost always initiated by Visa and MasterCard in the form of changes to the interchange rates. I don't necessarily think that this is a bad thing as it creates some natural churn in the market and permits margin adjustments for merchants with exceptional pricing. However, it does naturally create a level of dissatisfaction for merchants when the rates they signed up for may potentially change a few months later.
In addition to the card associations, there are external factors that can affect merchants, such as the PCI Data Security Standard or government legislation like the 1099 IRS reporting requirements. Many of these new initiatives or standards are beneficial, but they all have associated costs that ultimately get passed on to the merchant in the form of new fees or expenses. Again, this translates to a customer satisfaction issue.
The next layer down from the card associations are the processors and super ISOs. We have driven margins down substantially over the years with the aggressive use of interchange plus pricing, loss leader price strategies and compensation models that reward "production" over profitability. As such, you are seeing many more miscellaneous fees introduced to offset the reduced margins on the merchant account rates. Any time a merchant pays a rate or fee they were not expecting, that will naturally reduce their level of satisfaction.
Below the processors and super ISOs, on the ISO/MLS level, are a number of things wrong. First, there isn't any standardized training program or certification that sales reps are required to complete in order to sell merchant services. There is really no barrier to entry and this creates a situation where anyone can "try their hand" at selling merchant accounts without really being invested in the future of the industry, the future of their portfolio or the future of their merchant customers.
Compounding this problem is the fact that, since many of these reps are independent contractors, there is very little oversight on their sales practices. This type of environment enables reps to utilize unscrupulous sales tactics that result in further merchant dissatisfaction and a loss of trust in the industry as a whole.
In addition, the bulk of the compensation to these agents has shifted to "production bonuses" that reward selling lots of accounts but with little regard to pricing. This inevitably leads to price increases once the merchant has been boarded or the inception of new fees to compensate for such low pricing.
All of these factors combine to create an environment of uncertainty for merchants in which the costs associated with credit card processing are constantly changing. Even if there are logical causes for the cost fluctuation, merchants perceive that they are being taken advantage of by these rate and fee increases. This volatility is naturally going to create merchant dissatisfaction and result in a reputational issue for our industry.
- On an industry level, the card associations are the primary enforcement authorities and the sponsor banks are the primary oversight authorities. This works well in most cases, unless it's one of these entities themselves that are contributing to the reputation problems, such as the excessive number of interchange rates and constantly changing fee/rate structures. These factors play a big role in the merchant's satisfaction with our services.
Below the bank level, the oversight and enforcement responsibilities transition to the processors and super ISOs. This is where enforcement becomes very difficult. Given the non-exclusive nature of our industry, a processor can terminate an ISO/agent for cause, and they can simply sign up with another company offering similar services. There is no definitive way to rid the industry of a fraudulent or detrimental agent and this is a major problem.
The only way I can see oversight and enforcement being done properly is through an independent association tasked with certifying and supervising ISOs and agents. The problem with this concept is an innate conflict of interest. Who would run or influence the association?
Naturally, one competitor could use the power of this association to disrupt another competitor's business. It wouldn't matter if it were banks or the card associations themselves; there are potential conflicts of interest on all levels. Visa and MasterCard are public companies designed to drive profits. They are not the "associations" of the past.
It would be very difficult for any card brand (Visa/MC), bank or processor to sit on an impartial board designed to certify, oversee and enforce ISO and agent standards. If we really believe it must come to that level of regulation, then it would need to be done by the government or a body that can truly avoid any conflict of interest.
- Sponsor banks, third-party processors, registered ISO/MSPs and ISO/MLS agents should all have some sort of certification or licensing process in place. Requiring each level of the acquiring industry sales process to adhere to such as standard is the only way to effectively enforce proper industry practices.
In today's environment, a bad agent or ISO can be terminated from one company and simply sign up with another company; there is no overarching oversight or enforcement at this level. There needs to be a standardized certification process in order to prevent these bad elements from becoming a detriment to our industry.
- None that I am aware of. The NAOPP [National Association of Payment Professionals] tried to put something together years ago and it failed. It failed because of the inevitable conflicts of interest that arise when individuals who are active in a business try to be impartial. It just wasn't possible.
I know that the ETA also looked into this a few years back, but nothing developed from it. It would be very challenging to do within the industry as it is extremely competitive and many interests are always at play.
- I believe the reputational issue lies more on the few bad apples who are both agents and ISOs. Not too long ago, there were organizations who focused on leasing 49.95/48 month leases and in return would "save" the merchant money, and in reality the merchant was stuck with a 48-month lease and no savings.
As an ISO, it was very hard to overcome the reputation issue. I don't think there is a single group or item that needs to change. I believe there is a great need for overall reform, led by the associations. After all, the associations are the ones that can implement and control the process better than any government mandate.
- I do believe the ETA has a good idea regarding certification. However, it would be nice if the associations managed it. Perhaps collectively (like PCI), they could join forces and get the government off our backs. A system that would allow ISOs to have a "blacklist" of agents, and processors for the ISOs list, that was maintained by the associations would be a good tool to have, and eliminate the bad apples.
- ISOs are already registered and monitored. However, they need to be closely monitored. Also, the agents need to be monitored. Why? These are the two channels that are the feet on the street. They are the ones that have created the problem.
- Not successful ones.
Polymath Consulting Ltd.
- There will always be bad apples in a barrel. It happens in every industry and we are naive to think that the prepaid card industry is any different. Whether bad through "over claims" or other factors, they will always exist.
However, an equally big issue is that as an industry, we need to educate the media/journalists about what prepaid is. There is still the belief by many that cash is free to the consumer and that prepaid, as almost a form of electronic cash, should also be free - the banks are big enough; they can pay for this.
As an industry we need to create better value propositions, often meaning that prepaid becomes a feature of a product rather than the product itself. With better consumer value propositions and better media education as to the true cost of cash, then the value of prepaid, and thus the fees needed to be charged, can be understood.
- At this point I will answer from a European perspective, as it is very different from the U.S. In Europe, the buck stops with the financial institution - not always a bank - which are in turn regulated by the financial service authorities [FSAs] in each market.
Their compliance teams must approve all communications and aspects of a program. The system works well in that there are hefty fines if rules are breached.
- If we look at the overall value chain, scheme members are registered through the country's FSA and schemes; funds deposit holders - i.e. banks are covered by FSAs; processors are certified by schemes; program managers are covered/managed by bank compliance; and, for MasterCard, registered.
The only potential gap is that neither MasterCard nor Visa, as far as I am aware, publish a list of all program managers, whether banks or otherwise.
This means that sometimes companies can pass themselves off as program managers without having all the required skill sets and relationships. In fact, I have seen resellers for program managers pass themselves off as the direct program managers.
- Yes, the PIF [Prepaid International Forum] certification process.
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