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Payments Shaken and Stirred in 2004

By Patti Murphy

Wow, has this been a heady year for payments businesses. Looking back from the perspective of a decade or so, someone might even deem it a pivotal year.

Consider some of the more salient events:

  • In October the U.S. Supreme Court refused to overrule long-simmering judicial decisions that Visa and MasterCard rules, which precluded member banks from issuing American Express- (AmEx) and Discover-branded cards, violated federal anti-trust law.

    Immediately following the decision, Discover filed a lawsuit against Visa and MasterCard. AmEx also filed its own suit in mid-November, making good on its threat to sue the card Associations.

    AmEx also named eight of the largest issuing banks that are members of the Associations, including Bank of America, JPMorgan Chase & Co., U.S. Bancorp and Wells Fargo & Co., in its complaint.

    AmEx did not name MBNA (which lays claim to being the largest issuer of bank cards) or mega-bank Citigroup in its suit and has inked deals with each of them to distribute its cards.

    Not to be outdone, Discover announced that it purchased PULSE EFT Association, the largest independent ATM/POS debit network in the country.

  • Banking giant JPMorgan Chase acquired Bank One Corp. Both organizations are considered powerhouses in payments businesses. Chase is among the largest of card acquirers and a leader in the automated clearing house (ACH) business.

    Bank One also ranks as a major acquirer and has operated Paymentech LP in partnership with First Data Corp. (For a detailed discussion of acquirer standings, see "2004 Payments Grand Prix," GSQ, December 2004, Vol. 7, No. 4.)

  • Bank of America Corp. purchased National Processing Co. (NPC), the transaction-processing arm of National City Bank. The combined company is expected to rank as the fourth largest acquiring organization in the United States.

  • The New York Clearing House, the nation's oldest check clearing facility, changed its name and acquired the nation's two largest remaining check clearing houses, one in Chicago the other based in California.

    Now known as "The Clearing House," the combined organization operates a payments system infrastructure for clearing and settling all manner of U.S. dollar payments in direct competition with the Federal Reserve.

  • For the first time in modern history, studies found that Americans are more disposed to using electronic payments than writing checks.

I've been writing about payments for 20 years now, and never did I think I'd see the day that cards and other forms of electronic payments would outstrip checks. Of course, neither did I expect to see major card-issuing banks flipping Visa- and MasterCard-branded accounts over to AmEx cards. Both events signal turning points for payments businesses. That's the kind of year it's been.

The Numbers Are In

The latest payments data, released by the Fed earlier this month, show Americans clearly have embraced electronic payments.

The Fed said that 36.7 billion checks cleared through the banking system in 2003, down from 41.9 billion in 2000, which represents a 4.3% rate of decline. Electronic payments, on the other hand, totaled 44.5 billion, up from 30.6 billion, and reflect a 13.2% annual increase in that same three-year period.

While the rates of change are significant, the numbers don't tell the entire story. The Fed counts as electronic payments all credit and debit card payments, as well as other card transactions (e.g. prepaid and EBT payments), plus ACH and wire transfer transactions.

ACH transactions are growing at double digit rates these days, and check conversion transactions are driving that growth, according to NACHA - The Electronic Payments Association, which oversees the ACH.

During Q3 2004, for example, accounts receivable check conversions (ARC, or checks written as payment for bills converted to ACH transaction formats and cleared as electronic payments), exceeded 266 million. This registered a 500% increase over the same period last year. POS check conversions totaled nearly 40 million in Q3, according to NACHA's numbers.

Translation: The banking system converted more than 300 million consumer-written checks to electronic payments during Q3 2004.

On an annualized basis, that means roughly 3% of payments that started out as checks during Q3 ended up counted as electronic (ACH) payments.

It might seem like a small percentage, but in raw numbers that's a lot of checks, and about one in seven of those checks enters the banking system through the POS. So don't "deep-six" POS check services yet.

Redefining the Card Market

Bankcard exclusivity is another matter. Combine the effects of this year's mega-mergers with the end of bankcard exclusivity, and the picture that emerges is of a card payments business that defies all past market delineations, and one that threatens to further undermine the banking industry's payments franchise.

For years banks have bemoaned the loss of payments businesses to non-banks. (Think Discover, the general-purpose credit card introduced by Sears, Roebuck & Co. and now a unit of investment firm Morgan Stanley.)

But that hasn't stopped some of the largest issuers of bankcards from diversifying into card brands such as Discover and AmEx now that the Supreme Court ruled the Associations' exclusionary practices illegal.

Apparently, MBNA was so anxious to flip its Visa card accounts to AmEx that it angered enough cardholders to merit in-depth coverage by "The New York Times."

Some folks interviewed earlier this month by the newspaper likened the bank's actions to "slamming," a practice telephone companies used in the 1990s to steal away competitors' customers. MBNA promptly stopped switching customers' Visa accounts to AmEx cards without their advanced permission.

Discover said that it's in talks with banks interested in issuing its card brand. In the meantime, Discover hired Lloyd Constantine (who led the legal charge against the Associations' honor-all-cards rules) to sue Visa, MasterCard and banks for lost revenue opportunities.

And Discover has bought its way into the debit card business, picking up PULSE, the last of the bank-owned EFT systems, for a cool $311 million.

AmEx is also suing the Associations and member banks. And it already has partnered with two large bank outlets for sale of its card products.

Discover's acquisition of PULSE, meanwhile, provides Discover with access to 90 million cardholder accounts, and all of those cards are tied to demand deposit ("checking") accounts at federally insured financial institutions.

PULSE membership includes 4,100 financial institutions, and any number of which can help Discover compete with MasterCard and Visa for branded debit volume.

After all, debit cards are the fastest growing payment instrument in America today, according to data from the Fed, research firm Edgar, Dunn & Co., and others.

"Discover's announcement that it is getting into the [EFT] business by purchasing the Pulse network does more than signal the entry of a formidable competitor into the debit market: It also challenges both established players and would-be newcomers to forge their own [strategies] in a payments scene that is changing day by day," said Ted Iacobuzio, Vice President of Research at TowerGroup.

Who's in Charge

Of course, no year in review could be complete without checking the pulse of the legal and regulatory sectors.

The defining moment came in October, when the Supreme Court denied Visa and MasterCard requests to overturn lower court rulings that its exclusivity rules were anti-competitive. The U.S. Department of Justice brought the charges against MasterCard and Visa.

In between, scores of consumer and merchant lawsuits were filed against Visa, MasterCard and banks that issue those cards challenging various fees, from foreign exchange fees to interchange and merchant discount fees.

And legislators introduced several new bills in Congress that take direct aim at payments businesses, including industry practices concerning foreign exchange fees and check funds availability.

The latter bill, introduced in November by Congress-woman Carolyn B. Maloney (D-NY), addresses what some consider imbalances in check funds availability rules created by the Check Clearing for the 21st Century (Check 21) Act, the new federal law that encourages check truncation.

While no action is planned on the legislation any time soon, it illustrates a sharpened federal focus on consumer payments issues.

Some members of Congress have also raised concerns about fees for online (PIN-based) debit card payments.

But a Fed study, requested by Congress and released in November, found that only 14% of banks offering debit cards charge at least some customers for online debit purchases. The average fee is about $0.75.

The Fed also reported that interchange rates for offline (signature-based) debit cards remain substantially higher than online debit card payments.

Consumer groups oppose the levying of fees on people who use online debit for purchases, but with a Republican-dominated Congress, chances are slim they will gain much legislative traction.

Still, the events of 2004 suggest clearly that Washington has its eyes on payments businesses.

Patti Murphy is Contributing Editor of The Green Sheet and President of The Takoma Group. E-mail her at

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