Cover Story

by Lisa Dowling

   In an industry where hospitality isn't always the end result, there's a movement afoot that hopes to encourage a more "hospitable" environment. The strategists are taking a page from Disney's playbook and issuing a challenge to VISA by inviting Acquirers, ISOs and merchants to "be our guest"´┐Żat least when it comes to transaction processing.
   It started back in 2002 when First Data Corporation announced it was developing a network called First Data Net (FDN). The plan-a new processing system to work exclusively on its own, thus eliminating the need and fees charged for use of other processing systems, such as Visa and MasterCard. Since the concept of non-association processing or "closed-loop" system, such as FDN, involves transactional processing outside the card issuers' networks, the expression "on us" has attached itself to this scenario. Simply put, First Data is offering their customers to process on them.
   Not surprisingly, Visa didn't take this lying down. It filed suit against First Data in an effort to block any processing of transaction through FDN and followed that up with a ban on all private arrangements. The battle line was drawn.
   First Data fired back with a countersuit against Visa alleging "anti-competitive and monopolistic practices that limit competition, innovation and choice in the payments industry." According to First Data, Visa's rules had allowed for private arrangements for many years but when First Data initiated an actual meaningful arrangement, Visa changed the rules.
   Publicly, Visa has stated that their main objection to allowing "on-us" types of transactions is that unless a certain percentage of a processor's transactions are processed through Visa Net, it can't control fraud and thus would have to increase interchange. Could it also be they just don't want to lose market share or money if transactions find another processing avenue?
   Needless to say, the industry is watching this battle closely. Processors are keen to see how it will all shake out, how it will affect them and if they would receive a better buy rate if "on us" becomes a commonplace process. It's no secret that First Data has been taking big strides in all areas across the industry playing field. Many would say they have more power and certainly more control than the card associations and that is a most interesting shift in power.
   Many also believe this latest stride is part of First Data's attempt at becoming an association and providing similar products and services as Visa and MasterCard such as issuing, risk management, etc. There is talk on the streets that First Data has plans to begin issuing FDC cards in 2008. If this happens, what will become of the entire interchange structure? Visa and MasterCard defend interchange by saying it is necessary to cover cost of fraud and risk management as well as compensation to the issuers for card issuing. However, if "on us" is successful, would it not throw the whole risk management argument out the window since First Data would, in effect, prove that it doesn't need Visa or MasterCard to manage risk. Food for thought!
   In the First Data camp, nothing current has emerged from the somewhat controversial strategy of this megacorporation. Their official word, "There's not anything else we can add in terms of newer developments."
   Unofficially, is First Data keeping their battle plans a secret to attain victory-or industry dominance? Are they being hospitable to the processing industry-or looking to host it in its entirety? Is the 800 lb. gorilla in the room growing so large that it's taking over the entire house?
   Over at Visa, it would appear their primary objective is preventing fraud that could result from non-association transaction processing. It is at the core of their defense. In an uncharacteristic display of openness and passion, two brilliant Visa strategists, John Shaughnessy and Jim McCarthy, offered their own insight into the battlefield.
   "When it comes to fraud, the biggest challenge is security of consumer data," says Shaughnessy. "It can be technologically challenging. Keeping up with changes to systems is not easy. It's all about securing the biggest asset-data. We rely on and trust that to ISOs and processors. They are an extension of our membership. Consumers trust them as well."
   "We know within Visa it is that trust and confidence that runs core to our brand," says McCarthy. "While the ISO is focused on signing and delivering merchants to the system, we are an association that runs on the transaction basis. Because ISOs support thousands of merchants, they have to update and maintain best practices. They need to follow the guidelines of CISP. If they are up to speed, Visa can deliver on the brand promise."
   What about the issue of "on us?" If other networks can bypass Visa and process transactions, how will that affect the primary argument of the necessity of using Visa to combat fraud. Will it truly open the door to fraud?
   "Fraud is the cost of doing business," says Shaughnessy. "Our job is to do everything we can do minimize those losses. We can only control Visa payment systems. The numbers bear out that we have done an effective job. Within the Visa system, comparing apples to apples, nobody can touch us with fraud fighting. When the industry looks at alternative avenues, they need to look at the total cost of acceptance, payment guarantee, total price of the transaction. It may start to look like a Visa transaction but without the value we bring. The bottom line-stay compliant. We all win in that transaction."
   What are industry insiders really thinking? Do processors and ISOs anticipate a change in the way they conduct business if FDC is successful in its campaign? Transaction World went to the source to find answers.
   When it comes to processors, there's none more prominent that Global Payments...and there's not a more knowledgeable professional than its CEO, Paul Garcia. He doesn't see non-association processing as a new concept.
   "Non-card issuers have been talking about closed-loop systems for years," says Garcia. "There hasn't been much movement but rather more rhetoric. Now I see a couple of ways to skin the cat. First Data has extraordinary resources. They have relationships with financial institutions and might even be coming into the same building as card issuers. Visa and MasterCard have abilities to preclude them and have valid reasons for not wanting First Data to do that."
   Garcia believes First Data's success, in large measure, depends on how cooperative their card issuing business will be and the fact that banks would have to be part of process.
   While First Data's card issuing business plan may not be growing by leaps and bounds, Garcia sees a change in the playing field...and an opportunity.
   "I now take First Data's plan more seriously with the acquisition of Star and their talks about a new credit/debit/ Western Union card," says Garcia. "It is possible they could come in with a new entrant. If First Data did come up with something like that, they would certainly be interested in accessing the merchant base of a company like mine with millions of locations and transactions."
   Could this be a partnership? Could Global Payments welcome a First Data victory in the battle for non-association processing?
   "I am looking for the best interests of my merchants and ISOs," says Garcia. "It is clear to me that if somebody has a good product offering, they are going to need access to my customers. If they truly have a good product, I suspect they will be motivated to offer me reasonable access so my merchants can have a good relationship with this product. Sometimes competitors make strange bedfellows and this could come to pass."
   Garcia doesn't see a big impact for the ISO community on the Visa side when it comes to the issue of a closed-loop system.
   "On a different system utilizing a new brand, the ISOs would be afforded, through us and other processors, the ability to have their merchants accept these cards if there was a compelling reason, such as a less expensive product for the merchant or one that could offer different functionality. I don't expect to see anything dramatic anytime soon. We aren't holding our breath."
   It something would develop, what does Garcia see happening?
   "I guess it would be a new brand and/or a new card not associated with Visa," says Garcia. "I could see an enormous advantage for First Data with regard to national business. You have national merchant rates of over two basis points. For those merchants, if you could reduce assessment fees or other Visa/MasterCard transaction costs that would amount to a couple of basis points, that would create an interesting situation. Visa has valid concerns, as does MasterCard. In this instance, MasterCard is letting Visa do the heavy lifting."
   The other sector of the industry that would receive an invitation to be the guest of FDN is the ISO community-and one of the premier ISO groups is Retriever Payments. With over $8 billion in processed transactions last year, Retriever has cause to closely watch the match up between the mega-corporations.
   "From what I understand, basically this is a closed-loop and First Data is big enough, from a market share perspective, to instantly dominate as a closed-loop," says Joe Natoli, Executive Vice President of Retriever. "This is an opportunity for First Data to capitalize on number of merchants. How do I feel about it? I think it is competition and American capitalism at its best. The strong will prevail."
   Like Garcia, Natoli doesn't see "on us" as a new and groundbreaking idea.
   "This is not a new concept," says Natoli. "American Express and Discover are already doing it. In fact, I believe Visa challenged Amex's position in trying to have banks issue their cards, but was unsuccessful. Visa is protecting their brand and I'd expect nothing less. They have been recognized for years. If First Data creates a brand, the consumers will be the ones who ultimately decide. I'm not going to say who is right or wrong. People have a choice."
   As a major player in the ISO arena, would Natoli expect to see lower rates being offered by FDN? Won't FDN disseminate the competition by processing on its own network and bypassing Visa's interchange fees? Won't FDC grow even bigger?
   "From the ISOs' perspective, I can't forecast what will happen, "says Natoli. "I can't suggest whether the fees would be higher or lower. I don't know what First Data's idea will be as to what type of card they plan on offering and how it will be handled. We are going to watch how it unfolds. It is premature at this time to overact. Visa, MasterCard, American Express, Discover-the dominant brands-will continue to be so. It isn't easy, no matter how big you are, to enter into this market at this level. Consumer and merchant acceptance is the key. If anyone can pull it off, First Data certainly has the scale."