The Broken Link - Digital Transactions

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TRENDS & TACTICS TRENDS & TACTICS Will the U.S. Meddle in Interchange? Regulatory fever over interchange is rising in Europe, and the U.S. may not be immune. The latest challenge came late last year, when the European Commission ruled that MasterCard Worldwide’s interchange-fee structure is illegal in that region. The ruling will affect relatively few transactions in Europe but could encourage regulators—including those in the U.S.—to act. “On balance, the EC decision is negative,” Eric Grover, principal at Intrepid Ventures, a Menlo Park, Calif.-based consulting firm and a former executive at Visa International, said in an e-mail message to this magazine’s sister publication, Digital Transactions News.The decision “will spur regulators in other jurisdictions to intervene and treat card payment networks like public utilities.” The stakes potentially involve billions of dollars. U.S. issuers of Visa- and MasterCard-branded credit and debit cards collectively garnered nearly $40 billion in interchange last year, Digital Transactions estimates (chart). If U.S. regulators followed the example set by Australia’s central bank several years ago and cut 8 • digitaltransactions • February 2008 interchange by about 40%, the hit would be nearly $16 billion. Not even interchange’s most vehement retailer opponents expect that will happen. Still, the EC’s interchange policies could embolden those in Congress or the federal bankregulatory agencies to take another The Rising Interchange Tab ($ figures in billions) look at this most controversial aspect of payment card pricing. Interchange is a per-transaction fee set by Visa and MasterCard and paid by merchant-acquiring banks to card-issuing banks. The fee typically is expressed as a percentage of the transaction plus a fixed amount, usually 5 or 10 cents. In practice, merchants end up paying the fee as acquirers pass it on as part of their discount-fee pricing. Challengers say interchange smells of pricing possible only in an oligopoly. But MasterCard says that market forces set interchange rates. Asserting that regulators should not intervene, MasterCard has said it will appeal the EC’s ruling at the European Court of First Instance in Luxembourg. In the Dec. 19 ruling, the EC stopped short of striking down the concept of interchange itself. Instead, it said the rates on cross-border MasterCard and Maestro transactions are anticompetitive and gave MasterCard six 2005 2006 2007 U.S. Bank Card Purchase Volume $1,700 $1,909 $2,159 Estimated Blended Interchange Rate 1.75% 1.80% 1.85% Revenue $29.75 $34.36 $39.94 Source: First Annapolis, Digital Transactions months to propose a new interchange structure compliant with the Commission’s competition law. In January, European Union competition commissioner Neelie Kroes said MasterCard faces a fine if it doesn’t comply with the ruling. About 40% of bank cards in the European Union are MasterCard-branded. MasterCard has a good chance of swaying the appeals court in its favor since its appeal “will be argued and decided on narrow legal grounds,” notes Grover. U.S. merchant groups have already mounted legal and public-relations
challenges to interchange. Last year, more than 50 merchant lawsuits challenging bank card interchange were consolidated into a massive class-action case in U.S. District Court in Brooklyn. Interchange hearings were held in the U.S. House of Representatives last year and in the Senate in 2006. Observers say the likelihood that the Federal Reserve would intervene in the interchange is small despite developments elsewhere in the world. Grover notes that the central bank has said that the fees are outside its jurisdiction and that such pricing should be left to market forces. Still, he says, the EC decision could embolden members of Congress who have been examining the issue, even though no regulatory legislation has arisen so far despite Congress’s change in control from Republican to Democratic hands after the 2006 elections. “Two years ago, I would have rated the chance of Congress passing legislation curbing interchange as close to zero,” Grover observes. “While still unlikely, the chances are higher today.” Any intervention would meet strong banking-industry resistance. “Honestly, I think the [bank] lobby is way too powerful,” says Adil Moussa, a payments analyst at Boston-based research firm Aite Group LLC. “It’s very unlikely that Congress is going to cap interchange.” Meanwhile, Visa Europe will have to change its pricing practices as well once the EU publishes its full guidance on what form of interchange it will find acceptable, Grover says. At the same time, he says, the decision against MasterCard is likely to prove only a “small negative” for Visa as it prepares its initial public offering. Linthicum, Md.-based First Annapolis Consulting Inc. provided U.S. interchange estimates for 2005 and 2006 based on Visa/MasterCard purchase volumes and blended interchange rates of 1.75% in 2005 and 1.8% in 2006. Digital Transactions estimated 2007 interchange revenues based on a projected 13% increase in purchase volume and a 1.85% blended rate mostly due to new card-network pricing that makes more cards eligible for higher rewards-card interchange. A Higher Profile for Image Sharing These days, the trafficking of electronic check images among banks is on a tear. Lost in all the talk about image exchange, though, is the fact that there is an alternative: image sharing. And, though it’s been quiet the last few years, sharing is starting to get attention again from bankers. “The power of image sharing is starting to be recognized,” says Diane Scott, chief sales, marketing, and product officer for Viewpointe Archive Services LLC. “We’ll see the market move in ’08.” With image sharing, banks deposit their check images in a massive storehouse, to be retrieved as needed for clearing and settlement. Collecting banks send only check data to paying banks. Those are much skinnier files than the big payloads required for images. Partly for this reason, sharing proponents argue it’s cheaper and more efficient than image exchange. The sharing concept got a big lift last month when Milwaukeebased Fiserv Inc. agreed to make its proprietary image archive part of Viewpointe’s enormous archive, the largest in the world at 112.7 billion checks. That will add 8.5 billion images to Viewpointe’s collection. But, more important, the move brings 1,600 Fiserv client institutions, most of them paying banks, within range of Viewpointe’s other 11 archive customers, which include some of the country’s largest collecting banks. That’s no small thing. Since it’s based on an archive, image sharing doesn’t require paying banks to be equipped to receive and clear images. That means there’s no need to print expensive substitute checks for banks that can’t handle images. The more paying banks can be brought into the archive to trade with banks of first deposit, the better. “Viewpointe’s hand is strengthened by being able to get thousands of endpoint banks [into the archive] where historically you had to ship images via the Fed at higher prices,” notes Bob Meara, a senior analyst at Boston-based researcher Celent LLC. The difficulty of getting images into the hands of small community banks is known in the business as the “last-mile problem.” Steve Ward, executive vice president of the financial institutions group for Fiserv, thinks the deal with Viewpointe helps solve it. “The overall driver [to participate in Viewpointe’s archive] is further enhancing the electronification of the check business,” he says. Still, nobody can quantify just how much more efficient image sharing really is. Scott says Viewpointe is still trying to quantify the cost advantage. “Net net, it works out to be not that much less” than image exchange, says Susan Long, who runs SVPCO’s Image Payments Network as a senior vice president at The Clearing House Payments Co. LLC, New York, though she’s relying on data that’s several years old. February 2008 • digitaltransactions • 9
Page 1: VOLUME FIVE, NUMBER TWO • DIGITAL
Page 4 and 5: SOME COMPANIES STAND OUT FOR OBVIOU
Page 6 and 7: D I G I T A L T R A N S A C T I O N
Page 8: THE GIMLET EYE FEBRUARY 2008 • VO
Page 14 and 15: TRENDS & TACTICS TRENDS & TACTICS A
Page 16 and 17: ACQUIRING February 2008 digitaltran
Page 18 and 19: ecently adopted NCR Corp.’s solut
Page 20 and 21: In addition, 67% of retail treasury
Page 23 and 24: Changing consumer behavior regardin
Page 25 and 26: Earn Interchange with United Cash S
Page 27 and 28: Inc., has announced enhancements to
Page 29 and 30: The SEAA is Back in the SouthEast A
Page 31 and 32: From the merchant perspective, deco
Page 33 and 34: Revolutionary Times Call for a Revo
Page 35 and 36: Yes, we’re on the Web. And in you
Page 37 and 38: SECURITY February 2008 digitaltrans
Page 39 and 40: they don’t want approved. Some cu
Page 41 and 42: ENDPOINT Behind the Experimentation
Page 43 and 44: ©2007 Digital Check Corp. All righ

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