Visa Inc and MasterCard Inc are moving closer to a settlement in a seven-year old case named In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation. Most analyst are predicting a settlement and possibly by the end of July. One of the possible settlement outcomes could be a reduction in interchange fees which is expected to have a negative impact on bank stocks. If your holding bank shares of major card issuers, be warned. If you are a small merchant, we will keep you posted here about what it means to you and anything you will need to do.

Visa introduces a new pricing model, but provides only limited details. As reported in the International Business Times, Visa will be implementing a new fee called a “Network Participation Fee” that will apparently be a fixed site fee billed according to number of merchant locations accepting any U.S. Visa debit, credit, or prepaid card.

While Interchange fees are scheduled to move lower in October, this new Visa fee (like other Visa fees charged to acquirers) will be pass through to merchants in one form or another. Given this fact, the idea is that the more Visa transactions a merchant accepts, the lower this new fixed location fee becomes on a per transaction basis.

Now that the final Fed rules give merchants control over the routing of transactions, Visa hopes that this new fee structure will incent merchants to choose its network over others in an effort to have enough transaction volume to make the fix location Network Participation Fee irrelevant.

How much will the fee be, when will it start and how will MasterCard respond? We will post details as they come available.

In California a ZIP code is personal identification information

In the case, Pineda v. Williams-Sonoma Stores, Inc., the California Supreme Court recently ruled that a ZIP code constitutes ‘personal identification information' as that phrase is used in California Civil Code section 1747.08 and that requesting and recording a cardholder's ZIP code is prohibited if it is requested as part of a credit card transaction.

The California Civil Code Section 1747.08 does indicate exceptions which would allow the ZIP code to be requested, including:

• When the credit card is being used as a deposit to secure payment in the event of default, loss, damage, or other similar occurrence;
• Cash advance transactions;
• When the person, firm, partnership, association or corporation accepting the credit card is contractually obligated to provide personal identification information in order to complete the credit card transaction or is obligated to collect and record the personal identification information by federal law or regulation;
• When personal identification information is required for a special purpose incidental but related to the individual credit card transaction, including, but not limited to, information relating to shipping, delivery, servicing, or installation of the purchased merchandise, or for special orders. E-Commerce and mail/telephone order (MOTO) merchants asking for ZIP today are covered under this exception in the legislation.

Unfortunately the AVS fraud tools built for the credit card processing arena are an innocent victim to the interpretation of California law.

For example, Pay-at-the-Pump is a high card testing arena for card theft. However, it is our understanding that Pay-at-the-Pump unattended solutions requesting ZIP to prevent card fraud would not be an exception to the ruling, as it is written, today.

Also, currently Visa’s Interchange requires retail merchants to use AVS (matching ZIP) as an additional fraud tool for transactions that do not swipe at the POS in order to obtain the best merchant Interchange rate. The concept is that since there is no way for the card issuing bank to know if the card was present, it helps ensure the cardholder is present. Most payment applications will prompt the clerk on a key entered retail transaction “Is the Card Present” and if they respond “Yes”, the clerk will be prompted to ask for the cardholders ZIP. Since the cardholder is present, the assumption is that there would be no reason to give anything other than their matching Zip Code. This provides more security and thus a better Interchange rate, CPS Retail Key Entry verse EIRF Interchange.

We assume Visa is looking at this requirement in light of this recent California decision since the legislation doesn’t consider this situation as an exception. In the meantime, retailers in California must weigh the cost of fraud and the small Visa qualification downgrade in Interchange in these instances vs. possible fines and legal bills which would likely be much higher if imposed.

Visa and MasterCard have agreed to new changes that will allow merchants greater flexibility to steer their customer’s payment choice.

The Dodd-Frank financial regulations signed into law in July allow merchants to set a $10 minimum card purchase. Now, announced in a Justice Department consent decree, Visa and MasterCard have agreed that merchants can:

• Offer consumers an immediate discount or rebate or a free or discounted product or service for using a particular credit card network, low-cost card within that network or other form of payment;
• Express a preference for the use of a particular credit card network, low-cost card within that network or other form of payment;
• Promote a particular credit card network, low-cost card within that network or other form of payment through posted information or other communications to consumers;
• Communicate to consumers the cost incurred by the merchant when a consumer uses a particular credit card network, type of card within that network, or other form of payment.

Visa and MasterCard can still require merchants to accept all cards within their brands. However, now merchants will be able to offer discounts for lower-cost cards or other forms of payment. Of course, merchants may refuse to accept card payments.

American Express did not settle.

Visa will implement changes to expand the CPS/Small Ticket program to all MCCs, except those noted below. This expansion is intended to facilitate growth for Visa and its members through increased issuance, acceptance, and innovation.  The extension of the CPS/Small Ticket Interchange program is intended to encourage faster transaction speed and enhance cardholder satisfaction at the point of sale, providing benefits to all.

Currently, only transactions from a specific group of merchant segments are eligible to qualify for the CPS/Small Ticket program. With this change, the CPS/Small Ticket program will be available to consumer card and commercial card transactions submitted with almost all merchant category codes (MCCs).   Current CPS/Small Ticket Interchange applies to transactions less than or equal to $15.   The Visa Small Ticket Credit Interchange is 1.65% + $0.04 and the Visa Small Ticket Debit Interchange is 1.55% + $0.04.   This will effectively lower many merchants overall Interchange expenses.

The following MCCs are currently ineligible for both the CPS/Small Ticket Credit and Debit programs. However, with the October 2010 Enhancements release change, they will be eligible for the CPS/Small Ticket Credit program; however, they will continue to be ineligible for the CPS/Small Ticket Debit program.

• 5411—Grocery Stores and Supermarkets
• 5499—Miscellaneous Food Stores: Convenience Stores and Specialty Markets

Also, with this change, merchants that participate in the following MVV programs may submit transactions that meet the CPS/Small Ticket program:

• CPS/Retail Performance Threshold program
• Utility program
• Debt Repayment program
• Visa Partner Program
• Debit Tax program
• GSA G2G (Government-to-Government)

Vantage tracks all Interchange rate and fee changes on our web site.  Read more on the pending fall Interchange changes to take effect October 2010  at http://www.vantagecard.com/price/interchange05.html.

Visa Australia announced it was moving to chip and PIN technology for all of its credit cards, with signature transactions to be banned by April 2013.

Visa's move to kill signature-based mag-stripe transactions by 2013 will require financial institutions and retailers to upgrade over 14 million visa cards, half a million point of sale terminals, and thousands of ATMs.

While fraud in Australia remains low by world standards, this aggressive rollout of new technologies will strengthen security reducing counterfeit, skimming and online card fraud. 

Is the U.S. next?

Vantage Card Services, Inc. is a registered Visa ISO.  Merchants can now verify compliance status on Visa’s U.S. List of Registered Independent Sales Organizations, available at www.visa.com/isolisting.

Many Independent Sales Organizations (ISOs) are unregistered.  The public nature of Visa’s new U.S. List of Registered Independent Sales Organizations will encourage banks and merchants to obtain information on ISOs to ensure a better understanding of their business partnerships.  Now that listing information is readily available to merchants, the hope is that fewer unregistered ISOs will be allowed to solicit merchants. 

In addition, the payment applications that merchants use and that ISOs sell, implement and support should also be on Visa’s list of registered third party processors that have validated compliance with the Payment Card Industry Data Security Standard (PCI DSS).  The Visa Global List of PCI DSS Validated Service Providers has helped drive compliance with the PCI DSS and has served as an incentive for service providers to register with Visa to decrease risk exposure to the payment system.

http://www.nytimes.com/2009/04/30/business/30visa.html

Visa posted better-than-expected quarterly earnings Wednesday as the credit card network increased prices and cut expenses. The company also benefited as consumers used debit cards more.  Net income rose 70 percent, to $536 million, or 71 cents a share, for the second quarter ended March 31, compared with $314 million, or 39 cents a share, for the period a year earlier.  On an adjusted basis, quarterly net income rose 38 percent, to $553 million, or 73 cents a share. Analysts had expected earnings of 64 cents a share, according to Reuters Estimates.  Net operating revenue rose 13 percent, to $1.6 billion, while total processed transactions — which represent transactions processed by VisaNet — increased 6 percent, to 9.4 billion.

Visa is partly insulated from rising defaults because they only process transactions and allow banks to take the risk of extending credit to cardholders. Even so, the company has seen a slowdown in the growth of revenue and transaction volumes as consumers used their credit cards less.

In a new global ad campaign, Visa changes focus to the advantages of plastic over paper cash and checks.   Consumer perceptions of credit card brands has been trending negatively because credit limits have been reduced and cards are being canceled.  The new campaign is designed to play up the security, control and convenience of using a Visa cards.  Visa launched Visa.com/go and Visa.com/goresponsibly as part of the campaing. 

The first thing of note is that the report is based on a one quarter lag which means Visa is really reporting on the end of 2008, not Q1 2009.  While this better than expected quarterly report represents approximately 40% of their total revenue, fiscal 2009 is off to a slow start and projected to slow further in the coming quarters.

However the resilience of Visa can be seen in the contribution of debit products in the US as consumers continue to more frequently use debit as a method of payment.  In fact, 95% of the volume in the Visa system comes from people that use debit cards which don’t have a credit limit or a credit card from people that either pay their bill in full every month or occasionally revolve and never revolve at more than 50% of their line.  Visa is banking on debit to continue to take volume from cash and checks and sustain respectable growth in this tougher economic environment.

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