The Broken Link - Digital Transactions

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