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GS Advisory Board
Debit Pricing: Confusion and Opportunity

After the Visa/Wal-Mart settlement was announced, we asked members of the GS Advisory Board how they thought it would affect our marketplace. The questions we posed were:

  • Will the recent Visa/MasterCard settlement on debit have any significant impact on ISOs/MSPs?
  • What variations of methods will the industry employ to address the new pricing required by the settlement?
  • Does this pricing change create any particular sales/marketing opportunity in repricing existing business?
  • Does anticipating pricing create any new market opportunity? There was significant consensus of opinion on this subject, which in itself is quite unusual. The conventional wisdom is that confusion will reign supreme in the marketplace among merchants, ISOs and Merchant Level Salespeople.

Bob Carr of Heartland Payment Systems summed it up: "Every price change gives acquirers and ISOs a chance to 'reprice' existing merchants, and this one is the 'Mother of All Repricing Opportunities.' "

Seldom does "interchange" rate as front-page material in the general news media, but this legal settlement brought attention to the esoterica of the payment processing industry - a mixed blessing, to say the least.

Carr stressed that "the Wal-Mart/Visa settlement will have profound impact on ISOs. Because the merchants will know what happened, they will be looking for their money."

Jared Isaacman of United Bank Card said "... Some ISOs and banks [will] increase their portfolio pricing - addressing the increased interchange credit pricing and disregarding the lower debit pricing. This is probably not a bad way to go since [ISOs] can't count on the lower debit card rates past [December] 2003. There of course will be other companies that will pass through the lower check/debit card rates and try to take an edge on the sales market.

"The other alternative is to do nothing - to not increase or decrease merchant pricing and hope for a wash. Going that route will require one less increase than the competition and will provide for a better position in January when check cards go back up." Isaacman reported that this was the plan at United Bank Card.

It will be interesting to see if the merchants go along with this idea, and GS hopes that Jared will report on whether his organization's plan is a success.

All of the AB members who responded agreed that this price decrease on check cards would be short lived. Carr, Isaacman and Douglas Mack of Card Payment Systems all expect the associations to increase the fee on these cards as of January 2004, as is allowed under the agreement.

Steve Christianson of TransPay Processing sees the current confusion as an opportunity to leave prices as they are with a marginal positive effect to the MLS profit equation.

"The ISO margins have been decreasing so fast the past several years that we believe most will maintain the present pricing to help catch up," he said. "Some banks make it difficult to price debit credit [offline] transactions separately, so that means no changes. Others that can have separate pricing will make a big deal out of it.

"The actual percentage of debit card credit [offline] transactions of total Visa/MC transactions is still debatable. Some ISOs are telling merchants it is 60+ percent, but it is our finding that it is less than 10 percent. So the merchants are not going to see any savings, and if they do it will be insignificant.

"The difficulty in portfolio-wide pricing changes costs ISOs a lot of money. Why would they lower them now and then have to increase them later when the settlement period is over?

"That requires another notification to the merchants, another portfolio-wide price change, which results in more losses for the ISOs because these changes create a multitude of errors and omissions by the sponsoring banks.

"It will be best to let this ride itself out until the settlement period is over rather than be subject to the errors these mass changes cause."

With the probability of having to explain to the merchants a rate increase looming just around the corner, it looks as if the rate decrease will be met with a lack of action. This might be the time to discuss equipment upgrades and add-on services instead of processing fees.

Instead of discussing basis points, the GS Advisory Board stressed honesty and transparency in dealing with the merchants. The more permanent result of the Wal-Mart suit may be in the changing of merchants' statements.

The latest fad in business relations is "ethics." The U.S. business media has made truth, honesty and integrity the must-have business style in this post-Enron era. Will this lead to the great unbundling of transaction fees? Will ISOs and processors race to see who can produce the most detailed, itemized statement?

As the dust settles during the next 12-18 months, stay tuned to this GS channel for more news.

At the recent ETA midyear meeting in Boca Raton, Fla., Visa presented its response to the settlement. Paul Vessey, Executive Vice President of Sales and Integrated Solutions, Visa USA, has said, "Clearly, consumers will continue to demand the right to use their Visa debit cards. So savvy merchants must assess the real and positive economic impact these cards have on their bottom lines before taking a chance at alienating their customers by refusing debit products."

Visa and MasterCard unveiled their new debit card designs. Both associations must clearly display the word "debit" on the face of the card. They have put in place design changes that will enable issuers to use existing card stock while incorporating the design changes ordered by the court.

Linda Perry, Senior Vice President of Acceptance for Visa, said the company has 140 million check cardholders in the U.S. These cards accounted for 7 billion transactions in 2002 and represent the fastest-growing Visa product. In a statement prepared by Vessey, Visa forecasts a 20 percent increase in check card volume in fiscal 2003 over the previous year.

Both card associations cited antitrust regulations while refusing to discuss pricing with ISOs at the ETA meeting.

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