Industry Evolution

by Ken Sturm

   First Data Corporation announced that they will launch their new credit card product on January 15, 2008 as reported recently in the Wall Street Journal. The new product will be accepted in 3.6 million merchant locations around the world. First USA and Citi Group are part of the 700 bank consortium that will issue the new card product.
   No, we're not trying to start a War of The Worlds panic here, but this is something that we feel is inevitable. Sure we may be off by a year or two or even five; this just seems realistic. Everyone in our industry is aware of the various lawsuits in which the Associations have been and continue to be embroiled. One suit is between First Data and Visa which revolves around the First Data Net direct settlement card processing platform which basically avoids sending transactions through Visa first before transactions go through the card Issuing Bank's processor. This is the potential case where First Data is the processor on behalf of both the Acquirer and the card issuer, a private network which could cost Visa a billion or more a year in revenue. This is by virtue of the fact that potentially 50% of the transactions here in the U.S. could reside on this platform.
   The second suit is from the Federal Justice department which takes the position that the Association may not prohibit Member banks from Issuing competing card products; namely American Express and Discover. The N.Y. Federal Court agreed with this concept, and was supported further on appeal by Federal Appeals court panel. Visa has already made the bold announcement that it expects to appeal this to the Supreme Court. There is no guarantee, however, that this case will even be heard by the high court.
   Our opinion is this: this second case ruling is going to stick like a Janet Jackson pasty. That being said, as big a threat to the Association that the internal ON´┐ŻUS private network clearing presents, a First Data credit card product posses a sizable threat as well. This is not to say that recruiting card issuers is a slam-dunk; remember, the big issuers have made lots of money over the years with the brands. The recent switch of both Wachovia and Wells Fargo off the STAR network to Visa's Interlink network is food for thought here. Consider also the nepotism of the big issuers, also sitting on the Association's boards, intimately involved with broad policy decisions. We're sure there are plenty of big issuers that are not exactly happy that they had to pony up huge sums in settling the Wal-Mart suit, and chances are good that there could be a compelling value proposition due to First Data's efficiencies at aggregating common operations, for all parties concerned in new transaction processing.
   Since our group is constantly wearing multiple hats, especially working in the trenches with sales representatives making the pitch to merchant accounts, we wanted to put together a "wish list" based on what we hear all the time as it relates to accepting credit cards. So if anybody from First Data is reading this, some of these requests might be coming from your own clients, which you may want to incorporate into a potential offering:

Depending on the back-end provider, merchant statements can have 14 different interchange categories or as little as three.

   Merchants don't like the nickel and dime approach of some 57 different Interchange categories set by the Associations. This is where the T&E; cards shine as it's easy to understand one rate. Hopefully First Data will keep it simple.

Expeditious funds transfer.

   American Express is viewed as a necessary evil as about 41% of their cardholders are exclusive to the card; very few merchants have anything real nice to say about American Express - especially based on the 72 hours holding of funds before EFT occurs.

Access to a Merchant's best customers.

   The term loyalty is thrown around all the time, in today's competitive merchant marketplace, owner operators want to take care of and acknowledge their customers in real time. card issuers need to do a better job of supporting their mer- chants with better, more robust, data that allows the merchants the opportunity to communicate with people that favor their establishments.

Rewards programs that are seamless.

   You'll be hearing about First Data's new EARN program which is a robust electronic rewards network; the fact that First Data invested the time and money into the ground-up technology platform means that they are cognizant of it's importance. Merchants would like offers communicated to cardholders on merchant statements, acknowledged at the point-of-sale in real time and customized with little paper- work. A tall order but something First Data has the infrastructure to handle.

Better on-line rates.

   Fraud is always a real issue as the bad guys are always scheming, but major strides have been made over the past few years and keyed transactions are seen as very expensive indeed.

Business to Business transactions.

   Large ticket B2B guys cringe when they see that the occasional Visa business card or some other non-qualified transaction cleared in excess of 3%. This is where the First Data Net private network could really shine with low rates and a strong stance on a chargeback policy; this is a monster rev- enue opportunity in the marketplace. On the flip side, micro payments need to be made into a realistic option for the merchants who want to utilize bankcards but can't afford a .25 transaction on a $1.50 sale.

Fairly priced, easy to understand Checkcard rates.

   OK, enough with the merchant requests, we want to be a little selfish with two of our own:

  • Provide access to third party processors to code to allow for robust transaction messaging that will enhance the transaction processing environment, and
  • Let pre-paid content providers have access to the "Highway" to allow for easier development and rollout of the products that merchants and consumers want

   Maybe the folks that run First Data already know this, they have really, really smart people at the top. The gene pool is deep here and you can bet if they have the chance to launch a new card product in our lifetime, it will have a strong mix of technology, marketing and aggressive entrepreneurial spirit. Let's hope they do it because competition most always breeds innovation and defeats complacency.