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Knowledge is Power
Tectonic Events To Rearrange Payment Landscape - Part II
By Bob Carr

The settlement documents in the Wal-Mart suit were released on June 6, 2003 and contain many of the important details that help explain what we can expect. Among the details, many of which will impact acquirers, are the following. (All quotations are from the Visa settlement agreement. The MasterCard settlement agreement is virtually identical to Visa's except as indicated in number 8 below. All italicized words were added by the author.)

  1. The Debit Rate Decreases Are Mandated From August 1 through December 31, 2003 but not beyond 2003.

    MasterCard is required to establish a signature debit rate 33.3% below its current Merit III rate (46.7 basis points lower) and Visa is required to lower the Visa Check Card rate by 48 basis points except for supermarkets, for which it is required to lower interchange by 14 cents. Visa and MasterCard are "... free to set interchange rates without restriction after that date (12/31/03) as otherwise permitted by law" (paragraph 8a).

  2. The "Honor All Cards" Rule Will Continue, but for Debit and for Credit Separately - With Monthly Notices Required Beginning in August.

    The agreement gives each merchant the right to accept only Visa debit products. If this option is selected, however, the merchant is required to accept all Visa debit products. The same is true for credit. Furthermore, the agreement requires that acquirers provide notice to their merchants on a monthly basis from August through December with "... clear and conspicuous notice to merchants that as of January 1, 2004 they will have the right ..." to accept debit only, credit only or both (paragraph 4d).

  3. All Merchant Contracts Beginning January 1, 2004 Are Required to Give Merchants the Option to Select Credit Only, Debit Only or All Products

    The settlement requires Visa to develop rules that "... shall also require that any contract used by an acquirer with any merchant shall provide the clear option (including a statement of applicable merchant discount rates by product) for the merchant to elect to accept Visa POS Debit Devices (meaning all signature debit cards), Other Visa Products (meaning all credit and other non-signature debit products) or both" (paragraph 4c).

    We will have to wait for these rules, but it appears that we are going to be required to ask 5 million businesses to express their desires as to whether to accept credit or debit or both and to fully disclose our rates for each card type. This is going to be interesting, especially for those ISOs who don't have particularly good relationships with existing merchants.

    Will this rule give the merchant cancellation rights if the new provisions are not offered by 1/1/04? Or will these new documentation provisions be required at the end of existing contract periods? This will be important to watch.

  4. Merchants Will Be Refunded Their Portion of the $3 Billion Settlement in a Lump Sum.

    Visa and MasterCard are allowed to make the bulk of their settlement payments over 10 years in installments of $200 million and $100 million, respectively, beginning December 22, 2003 (except that the first year's payment is $15 million higher for each and both must pay an additional up-front payment of $10 million before July 4, 2003).

    Despite these annual payments, the settlement provides for securitization of these payments, meaning the cash to pay merchants will be available in a lump sum after taking out imputed interest and other fees.

    We all will be watching to see how the parties work out the mechanics of allocating these monies to merchants and what role, if any, the ISO and acquirer will have in assisting their merchants in identifying the amounts of cash they can claim.

  5. All Signature-Based Debit Cards Appear To Be Eligible For The Lower Debit Interchange Rates.

    This is huge for the hospitality, travel, MO/TO, Internet and other card-not-present merchants. The settlement clearly states that the lower interchange rates will apply to all "... types and categories of Visa POS Debit Device transactions ..." (paragraph 8a).

    In Part I of this series, I raised the issue of currently non-qualified check card transactions because of card-not-present and other disqualifying criteria. In an early June release to acquirers, MasterCard clearly indicated that the new interchange rate for signature debit will apply to all qualification levels.

    MasterCard created a new category of interchange called "Consumer Debit Card Interchange." The rate is 0.97% plus 10 cents per ticket for all categories except supermarket, warehouse club and convenience. With this announcement, MasterCard also announced a three-basis-point increase in Merit III to 1.43% and 10 cents and a 10-basis-point increase in Key-Entered credit transactions to 1.90% plus 10 cents as well as other rate changes.

    These increases are in lieu of the otherwise anticipated October rate increases from MasterCard and become effective August 1, 2003 along with the new Consumer Debit category.

    As of this writing, Visa has not published its new rate tables, but the language in paragraph 8a of the settlement document appears to mandate the direction that MasterCard has announced and ameliorates the concerns on this topic that I expressed in Part I.

  6. No Mandate To Pass Lower Rates To Merchants.

    There appears to be no language in the document that requires acquirers to pass the rate-decrease savings on to their merchants. Obviously, if a merchant has a cost-plus or pass-through contract (as most large merchants and all Heartland merchants do), they will get the benefit of the decrease. Merchants without such contracts have no contractual rights from the settlement to these decreases (see part I of this series for further discussion of this issue).

  7. New Signage Required.

    Acquirers are required (paragraph 6) to provide new signage to merchants who request signage if they implement a new policy of accepting only debit or only credit. It appears that merchants can be charged fees for this signage.

  8. Visa Competition for Network Processing Contracts.

The discussion about the announced tentative settlement of this litigation on April 30, 2003 centered on Visa being prohibited from competing with Concord when the PIN-debit processing contracts of the large banks expire at the end of 2004.

The discussion was that the settlement mandated that Visa would be prohibited from paying the banks up-front cash payments to induce the banks to switch processing from the Concord platform to the Interlink platform owned by Visa.

The Wall Street analysts and industry experts were discussing that $500 million of up-front payments in aggregate would be required to renew this business on the Concord platform or to induce the banks to switch to a new platform.

This was the hot topic at the payments investor conferences and various meetings of the trade as the price of Concord's stock dropped from $32.69 in June 2002 to $7.80 in March 2003.

It was the subject of one analyst report after another as this new "renewal bonus" factor became the subject of "paying twice" for the network business of the big banks (in reference to Concord's blockbuster purchases of the MAC and STAR and HONOR networks in recent years).

Of course, all of this combined with other bad news from Concord caused the precipitous drop in Concord's market cap. And this drop in value triggered Concord's approaching of FDC for a bail-out merger of the two non-bank industry giants. (The market cap of these two companies is $40.7 billion compared to an aggregate market cap of the two other public non-bank acquirers of $1.6 billion.)

The only language in the settlement document about the subject of Visa's competing for the network processing business is in the short paragraph 10, which says Visa "... will not enter into a contract with a member financial institution that prohibits the financial institution from issuing an ATM and/or POS debit card of any competing ATM and/or POS network, other than one operating under a trademark owned by MasterCard. MasterCard's settlement contains no such language and does not address this issue of "Competing Debit Marks."

Clearly, more needs to be learned, but the inference is that Visa negotiated this "no incentive" provision away in the drafting of the settlement agreement. If that is what happened, this outcome will allow Visa to compete for PIN-debit processing, although on a non-exclusive basis, and FDC will have a much more difficult job of meeting its Strategic Objective, which is "to process every electronic payment transaction worldwide from the point of occurrence to the point of settlement" (see news_factsheet.jsp). More to follow in Part III.

Additional Issues and Ramifications

The 40-page Visa settlement agreement discusses other details that impact card issuers, networks, BIN assignments and other matters pertinent to the industry. Of course, it is clear that Visa has a lot of work to do very quickly. Rules must be created for the acquiring banks, and lots of software must be written and modified by IT staffs across the nation.

Some merchants already have stopped accepting Visa credit cards despite the settlement not giving them this right until January 1, 2004. I doubt that anyone is going to try to stop them from doing this.

Also, Visa and many acquirers are working to identify whole new categories of merchants who now might be willing to accept debit-only because of its lower costs. Utility companies, apartment complexes and other recurring-payment acceptors might be considering this newly available approach to card acceptance.

Also, a high number of users of electronic bill payment processing (EBPP) desire to use their debit cards for their payments instead of checks, and the lower cost might encourage more use of signature debit for this burgeoning service by EBPP providers.

The lower interchange also will provide a lower-cost alternative to ACH processing for many payment acceptors. Will this new interchange level actually increase the ISO and acquirer opportunities to grow processing volumes and customers and revenue? Some industry observers, including this one, think so.

In fact, Dove Consulting has suggested that revenue from these new merchant segments might provide revenue to issuing banks that could offset the losses from the lower signature-based debit rates. In a recent press release, Dove stated, "In the end, the unbundling of credit and debit will actually increase card issuer and bank revenues just as it did in other industries, including computer software and telecommunications." (For more information, contact Dove at

First Data-Concord Merger

Finally, I had indicated that Part II would discuss the declining market share of First Data's merchant acquiring business and how that relates to the FDC-Concord merger. Because of the recent release of the Visa settlement, I have deferred this discussion to Part III except to state a few facts (derived from an analysis of Nilson and GSQ rankings reports) about some of what has happened to the acquiring landscape over the five years from 1997 to 2002 without much comment by industry observers.

Following are some items that will be further explained in Part III:

  1. First Data's share of the market has decreased from 39.5% to 31.4% if Paymentech (owned 42.5% by FDC) is not added into FDC's figures (which it shouldn't be), a drop of 20.5% of its market share despite acquisitions including BP Petroleum's huge petroleum processing platform.

  2. The number of "alliance" banks of First Data has decreased from 12 banks in 1997 to six banks in 2002. The six include a couple of very small participants.

  3. The market share of the Top 5 acquirers (including FDC as number 1) has dropped from 78.7% in 1997 to 68.8% in 2002 if all "alliances" are included in acquirer figures (as they should be).

  4. The market share of the Second 5 (number 6 through 10) has increased from 13.3% to 15.3%.

  5. The market share of the number 11 through 25 acquirers has increased from 5.1% to 11.9%.

  6. The market share of the rest of the acquirers has increased from 2.9% to 4.1%.

The obvious conclusions from these facts are that, despite massive acquisitions by the big guys to maintain market share, the smaller guys continue to take market share from the big guys on the margins. The argument that this is a consolidating industry is oversimplified and ignores important facts. If this sounds exactly like the opposite of what you have been hearing for years, it is. More to follow.

Bob Carr is the Founder, CEO and Chairman of Heartland Payment Systems, the nation's largest privately owned merchant acquirer and ninth largest overall, with annual revenues exceeding $300,000,000. Heartland was recognized by INC Magazine as the 57th fastest-growing private company in America and is one of the 10 largest INC 500 companies. Bob was a Founder and Vice President from 1988 to '90 of the Bankcard Services Association, which has since become the ETA.

To learn more about Heartland, e-mail , visit or

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