Cybersource, which provides payment processing, fraud management and payment security solutions to approximately 295,000 merchants, processes about 25% of ecommerce transactions in the U.S. Its merchants include British Airways, H&R Block, Nike, Facebook, Google and Home Depot.  Cybersource processed $120B through Visa in 2009 and 90% of its revenue is in recurring business.  Is Visa crossing the line into merchant processing, where they would reap revenues from transaction processing services as well as from the assessments it charges to merchants?  Not according to Visa.

“PayPal has 78 million accounts in 190 markets around the world.”

During a conference call held on April 21, Visa discussed how their strategic focus will be on “growth in the ecommerce sector by increasing the usage of Visa core products, using Visa’s client relations to drive global expansion, building on CyberSource’s merchant relationships to grow Visa ecommerce solutions and delivering best-in-class fraud management and data hosting solutions”.  According to Visa Chairman and Chief Executive Joseph Saunders, Cybersource wants to expand into the international market, primarily Latin America and Asia, through Visa’s global presence.  Last year, only about 8% of Cybersource’s revenue came from outside the U.S.

Visa is trying to find ways to compete with other ecommerce companies, such as PayPal, who has 78 million accounts in 190 markets around the world.  Although Visa has a strong global presence, the company wants to expand into global ecommerce markets where mobile payments are becoming more mainstream, primarily due to the lack of infrastructure for processing card payments.  Cybersource will help them get there with its strong foothold in mobile payment systems.

Ecommerce is a hot area for many companies trying to expand globally.  MasterCard’s next CEO, Ajay Banga, identified emerging markets and ecommerce as priorities for the company and it has created a new global research and development unit for that purpose.  MasterCard also recently revealed that it is opening up an online mall (“MasterCard Set to Open an Online Shopping Mall“) and Walmart is increasing its global ecommerce efforts (“Wal-Mart Ramps Up Online Efforts Globally“).

Visa is also planning to roll out their new Right Click by Visa product – which will enable consumers to comparison shop online, solicit feedback from friends, and checkout faster – sometime this summer.  Moving towards the year 2015, Visa’s strategic goals include “global diversification, entering new businesses, growing VisaNet transactions, and becoming a global top 75 company through market growth”.  Currently, 59% of Visa’s revenue comes from U.S. consumers.

For those concerned about Visa crossing the line into the acquiring world, sit tight.  On the April 21 call, they cleared the air by stating that Cybersource will move out of the processing business, referring merchants to financial institutions that partner with Visa.

A copy of the presentation used on the April 21 conference call can be found here.

Operating Guideline Changes

Visa and MasterCard both instituted changes in their operating guidelines in response to consumer disputes about card not present transactions and direct response products and services.  MasterCard’s actions followed policy changes from Visa regarding descriptor formats and disclosure of corporate entities related to direct response offers.  While the changes concern online marketers and merchants, they also affect direct mail and telephone marketing businesses.

“Remember the Columbia Record Club?  They are a prime example of negative option marketing, which shows that it has been around a long time.“

MasterCard communicated their “Direct Marketing Best Practices” guidelines to their acquirers and direct response marketers to further enforce compliance.  The guidelines focus on terms disclosure,  trial offers, marketing, endorsements and testimonials, affiliate marketing (CPA) networks, billing timeframes, refund policies, back end offers (up-sells, cross-sells), descriptors, order fulfillment, and customer service.

Of course these changes are meant to protect the consumer.  However, any business affected by these changes should think positive.  Consumer complaints can turn into negative publicity (and subsequently, reduced revenue) for any company.  Let’s not forget increased chargeback ratios, which no merchant desires.

A Little History

The Federal Trade Commission (FTC) was created in 1914 to prohibit unfair competition and practices in commerce.  The agency enforces laws targeting specific marketing practices and product promotions, such as environmental claims, free products, mail and telephone orders, and negative option offers.  Section 5 of the FTC Act prohibits unfair and deceptive practices – more specifically, advertising and marketing, in any medium, to consumers.  Section 5 describes a product or service as deceptive if it misleads the consumer or affects consumer behavior.  Additionally, product claims (i.e. “xyz product” prevents illness) must be substantiated, especially if they concern health, safety or performance.  The key marketing principles listed in the Negative Option staff report are meant to guide the industry in compliance with Section 5 of the Act.

“The FTC Act prohibits unfair or deceptive advertising in any medium”

The FTC also implemented changes to its Guides Concerning the Use of Endorsements and Testimonials in Advertising in December, clarifying that “advertisers are subject to liability for false or unsubstantiated statements made through endorsements, and that endorsers also may be liable for statements made in the course of their endorsements.”

California Is Taking Action As Well

On a similar wavelength, a new bill, SB 340, regarding automatic renewal and continuous service offers was signed into law in October in California.  SB 340 came to light following a 2006 lawsuit against Time, Inc., for automatic renewal offers and solicitations.  Twenty three states received complaints from consumers, which resulted in an extensive investigation.  Time was billing or automatically charging consumers’ credit cards for magazine subscriptions without consent.  The company had changed their renewal policy and instead of subscribers actively renewing, they instead required subscribers to actively cancel their subscriptions.  Else, the renewal was automatic. The renewal policy always appeared in fine print and was not clearly stated.

SB 340 requires businesses to state “clearly and conspicuously” the renewal terms and obtain the subscriber’s approval at the time of purchase.  Clear and conspicuous is defined as “in larger type than the surrounding text or in contrasting type, font or color.”  In the case of telephone marketers, the audio disclosure must be “audible and understandable.”  It also requires the inclusion of a cancellation policy with the renewal offer and an easy way for the subscriber to cancel.  The bill goes into effect on December 1, 2010.

Per the FTC Act, sellers are responsible for product and service claims.  Third parties, such as advertising agencies, web site designers and catalog marketers, can also be found liable for product deceptions and unfair competition practices.  Those found to be non-compliant could face enforcement by the FTC as well as civil lawsuits.  Punishment includes cease and desist orders, fines up to $16,000 (per violation), federal injunctions, and consumer refunds.

Additional Resources:

• Direct Marketing Best Practices
• FTC Negative Option staff report
• FTC staff paper, Dot Com Disclosures, about online advertising
• FTC Guides Concerning the Use of Endorsements and Testimonials

Overseas, many organizations have formed campaigns against Visa and MasterCard. In Canada, ad campaigns are being run by The Retail Council of Canada telling Visa and MasterCard to “stop sticking it to retailers.” The Retail Council of Canada is a non-profit association that represents more than 40,000 stores of all retail formats.

In Europe, ongoing Interchange battles have reached boiling points. EuroCommerce, the retail and wholesale governing body, is accusing MasterCard of raising interchange rates 160% after the release of MasterCard’s new interchange fee structure. On December 19^th, 2007, an agreement was signed prohibiting MasterCard’s multilateral interchange fees (MIF). These fees apply to almost all cross-border card payments in the European Economic Area (EEA). This card type was prohibited because it is said to inflate the base on which acquiring banks charge. Since 85% of businesses accept these card types in Europe, it is said to potentially harm businesses and their customers. Naturally, MasterCard will raise other card type fees in order to compensate for money lost on fees from MIF.

Australia has already won their battle against interchange. Fees in Australia are capped, and in some cases they pay half a percent. Of course lower interchange rates, in my opinion, have been the result of fear. Card associations are afraid that regulations will be imposed if they do not lower their fees.

It’s only a matter of time before Visa and MasterCard will have similar regulations imposed upon them. But, are these fees price gauging or just a fair network of profit? It seems to me that we are all happy with our sky miles and rewards point, but are oblivious to where money for these rewards comes from. The people that are coming up with these regulations could be forgetting we are in a capitalistic society. Would we haggle over the price of our dinner at a high end restaurant saying the restaurant charged too much, after we already read the price on the menu? Merchants are aware of the rates they are going to pay before they sign their agreements. Perhaps we need to do a better job of educating merchants about Interchange fees and what they are used for.

Both companies have a lot going for them.  They are (even in today’s economy) considered to be excellent stocks with prospects of a bright future. They have an excellent product in a world moving to cashless options. Visa has gotten a great deal of attention because of its IPO earlier this year. It is my opinion that both companies have exploded from their respective IPOs, but MasterCard still remains the more stable bet.

Here are some things to consider:

Keep in mind that Visa and MasterCard are technology companies.  They are not responsible for any credit card losses due to unpaid bills. Both MasterCard and Visa just facilitate the transactions. The banks, such as JPMorgan Chase and Bank of America, are responsible for the debt. Even though Visa is twice the size of MasterCard, don’t let that be the deciding factor on which of these two giants is better overall.

Here is something most may not know about Visa. Visa left its most lucrative market out of the shares you and I bought when they went public – I am referring to their European market. Europe is now under one currency and growth is anticipated since intercountry commerce has been made easier. Visa Europe is still owned by European banks, and operates as a licensee of Visa you can purchase stock in. With MasterCard, you purchase European operations when you purchase stock.

So why do I lean toward MasterCard as the wiser and more sound investment? MasterCard enables you to get a piece of the very lucrative European action. Also, many analysts say that say that MasterCard’s growth will soon move far ahead of Visa.

Visa and MasterCard are under the gun in Congress as well, for price-fixing and price gauging practices. The Credit Card Fair Fee Act (HR 5546/S 3086) stops the price fixing by Visa and MasterCard by insisting upon the use of a transparent market-based process. Some may say these are anti competitive practices, while others speculate that regulation is necessary.

Competition is what makes our economy thrive. Are Visa and MasterCard really getting too big for their britches, or are they trying to keep things secure and regulated? Visa responds that “HR 5546 remains and anti-consumer bill that would mandate unnecessary regulatory intervention into a fiercely competitive industry that is benefiting consumers, merchants, and financial institutions.”

While merchants out there are probably cheering on the intervention of Congress, this may not be a great thing. The card processing industry is complex and involves more than just the rate a merchant is paying. The Credit Card Fair Fee Act allows merchants to negotiate Interchange rates, which could cause merchants to lose out on the service, customer support, equipment upgrades, and personal attention that their card processing company provides. Visa and MasterCard are not going to provide any extra services if negotiations occur; in fact lower Interchange rates will probably cause the opposite effect.

In nature we have the cycle of life – in card processing we have the life of a transaction. It is important to understand where the fees come from and know who all the players are.

• The process starts with the consumer making a purchase via a terminal or website.
• The merchant’s terminal transmits the transaction, via DSL or phone line, to the acquiring bank.
• The acquiring bank routes the transaction to a processor, and then to the card associations via Visa’s system (VisaNet) or MasterCard’s system (INET).
• The association’s system requests an approval from the issuing bank.
• The issuing bank sends back a response. If the card is approved, an authorization code is sent back to the association. The association sends the code to the acquiring bank, and then to the merchants terminal.

Issuing banks charge Interchange fees to the acquiring banks. These fees are part of the costs that merchants pay to their bank. Whether you are using a big bank or a smaller provider as your card processor, there is a mark up on Interchange fees. This mark up (basis points) pays for your application process, customer service, risk monitoring, and of course your sales rep.

Both acquiring and issuing banks are charged fees by the card associations. Assessment fees are Visa and MasterCard’s primary source of revenue. You may have seen these on your merchant statement as 0.0925% and 0.0950%. These are typically less confusing because they are standard and don’t vary based on criteria.

Since there are many different processing categories for Interchange rates, they can be confusing to most merchants. Merchants pay higher or lower rates depending on, but not limited to, whether or not it was a rewards card, purchase card, or debit card. Rates can also be assessed based on your SIC code and how often you batch your terminal.

I would recommend that all merchants become familiar with the Interchange rate for their industry, as well the manner in which they take their cards (swiped or keyed). This way you can negotiate your rates with your merchant services provider accordingly. Just because your payment processor claims the rates went up does not mean they went up for your type of business. Some processors may even entice merchants with low rate like 1.11%, only to have you start processing and realize that rate does not pertain to your type of business.

Fortunately there are a lot of processors out there that don’t hide fees from their merchants. It is important for merchants to be educated about card processing fees.

If you have received a statement with an increase notice on it, be sure to do your research so you know exactly what is being increased.

According to the bank card associations, in October 2008 any merchant that applies for a new merchant ID from any credit card processing company must be PCI DSS compliant. In some cases this may mean the merchant will have to download a new application into their terminal. By October of 2009, all merchants must be PCI DSS compliant.

If you are using a POS terminal at a retail location, you are still passing data through the system. The application running on your terminal must be an up-to-date version. Most card processors call you to do a download or an upgrade similar to when truncation laws were put into effect. If you have not received a call yet, be proactive and call your card processor to get compliant.

So why is it important for a merchant to be PCI DSS compliant? Well for one thing the members of PCI Security Standards Council (American Express, Discover, JCB International, MasterCard, and Visa) continually monitor cases of account data compromise. A security breach and subsequent compromise of payment card data affects many different entities from card holders to business owners.

If you are a merchant, below are some suggestions from the PCI Data Security Standards website:

1. Make sure that sensitive data is never stored. This includes any magnetic stripe information or PIN numbers.
2. Find out what type of security is in place from your POS vender. Find out if you need to install a firewall.
3. Are complex and unique password required to access your POS system?
4. Does your POS Vender have access to your system remotely?  If so, who has access?

These things will get you started but make sure to consult PCI DSS Compliance guidelines to make sure you do not end up getting fined.