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Lead Story:

Heavyweight on Ropes: Visa Could Get Black Eye

G eez, payments is a litigious business. Visa - ensnared in litigation with retailers over its accept-all-cards rule and seeking an appeal of the Justice Department's victory in its antitrust case against the card associations - is suing First Data Corp. Visa argues that First Data, the nation's largest processor of merchant card transactions, threatens to sully the Visa brand name with a new service that lowers costs by keeping transactions in-house. Visa rules stipulate that all transactions initiated with Visa-branded cards must pass through the VisaNet authorization and settlement network.

Meanwhile, some of the retailers that are suing Visa (and its rival MasterCard) have threatened similar action against NACHA, the bank-dominated ACH rules group, based in Herndon, Va. These retailers are concerned that the banks that dominate NACHA's board of directors are trying to change the pricing model for ACH payments. They're especially worried that change would usher in interchange pricing for nascent ACH payment types, such as POS check conversion.

The Food Marketing Institute (FMI), in an April letter to NACHA, accused the group of intentionally excluding retailers from the discussion and raised the specter of the Sherman Antitrust Act. FMI is a Washington-based trade association representing the interests of grocers.

"Rest assured, if NACHA persists in allowing [its Interbank Compensation] Task Force to be used as a tool for banks to develop and implement these fees, FMI will take appropriate action to protect and compensate its members, including cooperating with federal and state antitrust enforcers and initiating litigation," wrote Timothy Hammonds, FMI's President and CEO.

NACHA's President and CEO, Elliott McEntee, shot back a terse reply, explaining that any change in pricing formulas would include public debate and ample opportunity for retailer input. But the explanation apparently wasn't enough for some retailers, such as Wal-Mart Stores, Inc.

Wal-Mart is the largest retailer to date to test POS check conversion. Michael Cook, Wal-Mart's Managing Director of Financial Services, figures the 12 million paper checks converted to electronic checks last year represented about one-fifth of all POS check conversions in the U.S. (Converted checks were about 1% of Wal-Mart's total POS check volume.)

However, in a presentation during NACHA's Payments 2002 conference, Cook hinted Wal-Mart would pull the plug on its check conversion program (in place at about 200 stores today) if ACH pricing goes interchange. And he read aloud from the FMI's April letter to NACHA. Putting Things into Perspective NACHA, like lots of other organizations in this era of consolidation, is facing a revenue crunch. So NACHA's board of directors dispatched a task force to study new revenue opportunities.

Their first mistake seems to have been in the selection of a name: the Interbank Compensation Task Force. It apparently conjures images of interchange in many retailers minds. NACHA's second mistake may have been bringing up the matter at a meeting of its Electronic Check Council. Unlike the Compensation Task Force, the Check Council includes as members retailers and other non-banks. Its mission: to sell businesses and consumers on ACH check conversion for POS and other checks. The ACH is touted as an inexpensive, electronic alternative to checks. But in reality, checks are really cheap to process. So any change that increases costs threatens to diminish the business case for ACH payments.

Every U.S. financial institution has access to the ACH, either through the Federal Reserve, or by contracting with a private-sector payments processor, such as Visa. Typical ACH payments include direct deposit of pay, automatic debiting for loans or insurance premiums, and corporate-to-corporate trade payments. Electronically converted checks are just a small part (about 1%) of the ACH workload.

Last year, nearly eight billion payments were processed through the ACH, according to NACHA. That's about a billion more ACH payments than were reported processed in 2000 but far fewer than the nearly 50 billion check payments that were processed through the banking system in 2001.

ACH items are priced on a per-transaction basis. The fees charged by most banks - upward of 10 cents an item - are substantially less than interchange fees for credit and check card transactions, which are based upon total value of the ticket.

Interchange fees were conceived of originally as a way to compensate card issuers for the risk of extending credit based upon authorization procedures performed by the merchant and its bank. But in recent years, Visa and MasterCard have moved to so-called "incentive" pricing, and today interchange fees are based on an assortment of factors, including retail sector (supermarket versus specialty shops) and transaction size.

Interchange fees differ from discount fees. Discount fees, which are charged merchants by their banks or processors for accessing the authorization and settlement structure, are a marked-up version of interchange fees. Visa Takes on First Data The authorization and settlement structure for payment card transactions is dominated by the card associations (Visa and MasterCard), which are controlled by banks - many of the same banks, in fact, that control the NACHA board.

First Data provides processing services to both card-issuing and transaction-acquiring banks, including some of the very same banks that dominate Visa, MasterCard and NACHA. Recently, the processing giant began testing a service that keeps some transactions in-house - notably, transactions in which both the acquiring and issuing bank are clients/partners.

First Data says this new in-house processing service will cut costs and simplify dispute processing, among other benefits. Visa says the service is a breach of contract.

Visa's rules require that any payment initiated with a Visa card pass through the VisaNet system at least twice: when it is authorized and when it is settled between the card-issuing and transaction-acquiring bank. Visa says it needs to do this to ensure quality control of its brand.

First Data controls nearly two-thirds of merchant card processing accounts in the U.S. The company handled more than 15 billion POS transactions last year; better than half of those were initiated with Visa cards.

So, why are these two giants preparing for a courtroom slugfest? Visa appears to be reacting out of fear. With 15 billion transactions potentially hanging in the balance, it's understandable. But suing First Data doesn't seem like the best use of Visa's resources.

The payments business is changing. First Data, it seems, is changing its business model to meet evolving market needs. If that means head-on competition with Visa, then Visa should brace for the competition instead of beefing up its litigation budget.

Visa, of all organizations, should understand the ramifications of marketplace evolution. In 1984, the Federal Reserve controlled the interbank ACH processing business. Working in partnership with several California banks, Visa helped topple the Fed's ACH monopoly over ACH processing and settlement. Today, banks can choose from a list of accredited ACH processors, including Visa.

Maybe something similar is in the cards for payment card processing and settlement.