Debit surcharges in California endangered

debate has emerged in California over the practice of merchants surcharging consumers when they use debit cards to make purchases at the POS. On one side stand proponents of a California State Senate bill designed to prevent merchants from applying fees to debit and prepaid card purchases. On the other side are retailers and representative associations who protest that the proposed ban would hurt business.

SB 933, authored by California State Sen. Jenny Oropeza, D-Long Beach, passed the Senate on a 22 to 9 vote on June 3, 2010. A date for a floor vote on the bill in the California State Assembly has not yet been set.

The legislation would close what advocates call a "loophole" in state law that allows merchants to apply surcharges on debit and prepaid card transactions. (Credit card surcharges are already banned under state law.)

The bill is sponsored by the consumer group Consumers Union. Many other consumer action groups, including the AARP, as well as chambers of commerce are in support of the bill. Visa Inc. has also thrown in its support.

In an April 5, 2010, letter to Sen. Oropeza, Paul Russinoff, Vice President, State Relations at Visa, wrote that the bill would "expand existing consumer protections for credit card use to debit cards." Rusinoff argued that "checkout" fees undermine the convenience and efficiency of electronic payments and place a burden on low-income consumers in particular.

The bill "recognizes that, at a time when working families face numerous challenges to make ends meet, they shouldn't have to face the confusion, embarrassment and added cost of getting to the counter only to learn that they must pay an unexpected additional 'checkout' fee," Rusinoff said. "Some of the hardest hit would include California's neediest citizens, those whose state benefits are distributed on prepaid cards."

In a statement to The Green Sheet, Sen. Oropeza said, "Social Security, veterans' benefits and child support payments are paid via debit cards, and unemployment insurance and disability payments will soon be paid through debit cards as well. Now is certainly the time to prohibit these surcharges.

"Prohibiting surcharges on credit cards is recognized as an important consumer protection; surely prohibiting debit card surcharges must be as well."

Retailers unswayed

But Bill Dombrowski, President of the California Retailers Association, believes Visa's support of the bill is tied to potential action the U.S. Department of Justice may take against Visa concerning its prohibition against merchants surcharging and "steering" transactions to payment forms on which lower interchange rates are charged. In 2008 the DOJ began to question whether Visa's surcharge ban violated anti-trust laws.

"Visa is facing a class action suit by the retailers in a federal case in Brooklyn, and one of the proposed remedies is that retailers would be able to pass on the interchange fee to the customers and break it out like you do sales tax on the receipt," Dombrowski said. "In California, that's against the law for all credit card transactions, but it's not against the law on debit card transactions.

"And so [Visa is] trying to argue that debit cards should be treated like credit cards, and customers shouldn't be hit with these fees. And they are trying to ignore the fact that it's the interchange fee that's being passed on that they caused."

Retailers argue that the surcharges are necessary to offset rising interchange rates. A November 2009 Government Accountability Office report concluded that "from 1991 to 2009, 43 percent of the individual Visa rates and 45 percent of the MasterCard rates that prevailed in 2009 had been increased since they were originally introduced."

The card brands counter that while merchants might be spending more on interchange, it is only because consumers are using payment cards more often.

Still plenty of options?

Ken Musante, President of Humboldt, Calif.-based ISO Eureka Payments LLC, said it appears the bill is targeting PIN debit transactions. While the actual language of the bill does not make that claim, Musante believes that is the bill's purpose because of the nature of businesses that surcharge on debit card purchases.

"Typically it's at locations that don't take credit cards, right?" he said. "And so they're using and working within PIN debit rules and the few PIN debit providers that allow them to put a surcharge in place."

Musante gave as an example the ARCO gas station chain that does not accept credit cards because of the higher interchange costs associated with credit. But because ARCO doesn't take credit cards, it can discount gasoline, which serves as an enticement for consumers to fill up there, he said.

That the station imposes a surcharge on debit card purchases does not reduce consumer options, according to Musante. "You've got the option of using your PIN debit card or you put cash in the machine," he said. "As a consequence their prices are less expensive, and they are charging the consumer for what their charges are for that type of acceptance."

A third option is for the consumer to go elsewhere. Musante compared the ARCO example to ATMs that charge fees; for instance, consumers can pay the fee to use a nonbank ATM because it is conveniently located, or the consumer can opt to find a surcharge-free ATM tied to the particular bank that issued the consumer's debit card.

Musante pointed out that while Visa forbids merchants to surcharge for debit card purchases, Visa does allow merchants to provide discounts on cash-only purchases.

The Green Sheet scores three more APEX awards

Wednesday, July 14, 2010

he 22nd Annual Awards for Publication Excellence (APEX) honored The Green Sheet Inc. with three awards for content published in 2009. The Rohnert Park, Calif.-based media company won two Awards of Excellence: one for issue 09:04:02 of The Green Sheet, which focused on social networking websites, and one for the entire website content of its newest venture, SellingPrepaid, which reports on the prepaid card industry.

The Green Sheet also received APEX's highest honor, a Grand Award for its article entitled "The Road Ahead for Mobile Payments," The Green Sheet, June 22, 2009, issue 09:06:02.

Complex but clear

APEX, an enterprise of Communications Concepts Inc., said 3,711 entries were evaluated, with 1,132 Awards of Excellence given out in 127 individual categories and 100 Grand Awards granted in 11 major categories.

The APEX judges noted the highly competitive nature of the 2010 entries. "Each year, the quality of entries increases," the judges said. "Overall, this year's entries displayed an extraordinary level of quality. The APEX judges saw only the most promising publications that professional communicators could enter. From them, they had the truly difficult task of selecting the award-winning entries."

Of the "The Road Ahead for Mobile Payments," the judges said, "A tightly-written and very clear analysis of complex financial and technical topics. Readers come away with an excellent understanding of the subject matter."

Three's a charm

Kate Gillespie, Chief Operating Officer and General Manager of The Green Sheet, said, "I am so proud of everyone at The Green Sheet. This would not be possible if we did not have such an outstanding team. We constantly strive to achieve excellence."

Gillespie said having SellingPrepaid recognized by the judges was especially rewarding because of the hard work put in by the entire Green Sheet staff in making the new website and SellingPrepaid E-Magazine relevant and entertaining. The website went live in March 2008.

Since first entering the competition in 2002, The Green Sheet has scored 41 APEX awards.

G20 targets financial services for the poor

Thursday, July 8, 2010

here was plenty of news out of Toronto June 26 to 27, 2010, when finance leaders and central bankers from the 20 largest economies gathered to map out strategies for addressing financial crises around the world.

If you were just following general news reports, however, you may not have learned that the Group of 20 (G20) also cast a set of principles it expects to underlie new and emerging initiatives to boost access to financial services among the world's poor.

The G20 consists of central bankers and other finance leaders from all of the major developed countries, as well as several nations with aspiring economies, such as China, India, Korea and South Africa. Its new principles offer a foundation for policies and regulations that promote financial inclusion through innovative uses of technology, like mobile phones.

"The G20 Principles for Innovative Financial Inclusion encourage policymakers to harness the potential of new approaches, such as branchless banking to reach the more than 2.7 billion people globally who are unable to open a bank account, get insurance or receive loans that would help them to save for the future and invest in their homes or businesses," said Alexia Latortue, Acting Chief Executive Officer at Consultative Group to Assist the Poor, in a statement endorsing the G20's efforts.

CGAP, a Washington-based policy and research center focused on banking the unbanked, helped to lay the groundwork for the G20's policy considerations regarding microfinance.

Nine central objectives

The document sets out nine core principles that G20 members agree must be at the heart of successful financial inclusion initiatives:

1. Leadership in the form of broad-based government commitments
   
2. Diversity in terms of products, competitors and delivery channels
   
3. Innovation at both the technological and institutional levels, especially in addressing infrastructure weaknesses
   
4. Protection in the form of comprehensive rules that balance the needs of governments, providers and customers
   
5. Empowerment through both financial literacy and financial capability
   
6. Cooperation within and between government, the private sector and other stakeholders
   
7. Knowledge in the form of evidence-based policy and test-and-learn approaches acceptable to regulators and service providers, alike
   
8. Proportionality, in other words, a regulatory framework that places equal emphasis on reducing risks and the benefits of innovations, and recognizes gaps and barriers in existing regulatory structures
   
9. A framework that reflects international and domestic standards, incorporates efforts to control money laundering and a clear regulatory regime for electronically stored value, and market incentives to support long-term goals like interoperability and interconnection
   

In issuing a communiqué regarding the principles, the G20 explained that the principles are not "a rigid set of requirements but are designed to help guide policymakers in the decision-making process." The G20 said it will now formulate concrete action plans for consideration at the next G20 Leaders Summit in Seoul, Korea, in November 2010.

Editor's note: This story was published by InsideMicrofinance.com June 29, 2010, reprinted with permission. © 2010 InsideMicrofinance.com. All rights reserved.

Congress approves interchange regulation amendment

Wednesday, June 23, 2010

s the details of the Restoring American Financial Stability Act of 2010 continue to be hammered out, an amendment introduced by Sen. Dick Durbin, D-Ill., to regulate fees levied on merchants for card transactions appears to have secured its place. On June 21, 2010, both houses of Congress agreed on a provision to regulate debit card interchange in the financial regulatory bill.

The reconciled amendment allows the Federal Reserve to cap debit card interchange at a level that's "reasonable and proportional" to the cost of processing debit transactions; it gives the federal government a year to determine precisely what that rate is; and it exempts debit cards issued by banks with assets under $10 billion.

Patricia Hewitt, Director of the Debit Advisory Service for Mercator Advisory Group, said the impact of interchange regulation is potentially significant, though difficult to predict.

"Debit cards represent the majority of transactions in the United States, so from a card perspective, I think we have to look at it at a very macro level," she said. "We don't know what the ripple effect is going to be when we potentially radically change a pricing model connected to the majority share of payment transactions in the United States. But that's going to have an impact."

More options for retailers

The amendment also allows merchants to decline credit and debit cards for purchases below $10 (on which interchange sometimes exceeds the retail profit margin). And it prohibits the monopolization of debit card processing – meaning debit cards must link to at least one other back-end processing network besides the one owned by the card's brand.

So Visa Inc.-branded debit cards that connect only to the Visa-owned debit processing network Interlink must now connect to another back-end system as well, and the same goes for MasterCard Worldwide-branded cards that currently use only MasterCard's debit processing network, Maestro.

"Passage of this measure gives small businesses and their customers a real chance in the fight against the outrageously high 'swipe fees' charged by Visa and MasterCard," Durbin said of his amendment, in a statement on his website. "It will prevent the giant credit card companies from using anti-competitive practices … and restore common sense and fairness to this broken system."

A few concessions

The finished amendment largely resembles the one Durbin introduced to Congress in June 2009, but it does make some concessions to the issuing banks and card companies that lobbied fiercely against it.

Among them are the exclusion of a provision that would have allowed merchants to offer discounts to consumers who pay with cash (something they are already allowed to do under card brand rules as long as disparate retail prices for the same item are not posted based on payment method); the exemption of government-administered cards and reloadable prepaid cards from regulation; and the use of fraud prevention as a consideration in determining a "reasonable and proportional" debit interchange cap.

Analysts have said this consideration may yield interchange caps that vary depending on the type of merchant accepting payment.

"By factoring in risk they're allowed to set different card expenses based on historical risk factors for certain types of merchants, as well as the usage of the cards," said Jeff Fortney, Vice President of Clearent LLC, an ISO.

Fortney said the provision calling for "reasonable and proportional" debit rates leaves the issue "wide open." He believes Durbin's interchange amendment is a political move to assuage the retail industry and that it's unlikely to carry much weight.

"I think it's much to do about nothing right now," Fortney said. "I don't think the Feds are going to waste their time on this. Given a year to come up with a fair and reasonable rate, do you think they're going to spend much time analyzing this? I don't. I think they're going to contact the networks and say, 'OK, guys, show me why you're charging this.'"

Fortney added that ISOs could actually benefit from the requirement that debit cards connect to multiple processing networks.

"Let's say I'm charging a fee for accepting PIN-based debit," he said. "I'm going to charge 20 cents plus network fees. My merchant could gain by being tied to a network that has a lower cost, but I could gain, too, because maybe I could charge 25 cents instead of 20, since I know everything's going to a lower cost, and PIN debit network fees aren't going to be so high."

But others feel the amendment could have damaging repercussions. A report from Mercator, "The Durbin Amendment: Impact Analysis," predicts issuing banks will compensate for reductions in interchange by charging new fees to consumers or by increasing existing ones. Such fees would offset any possible savings to consumers from lowered retail prices that may stem from regulated interchange rates, the report indicates.

Potential problem for smaller banks

The paper also predicts that community banks could suffer if merchants steer customers away from debit cards issued by smaller banks (those with assets under $10 billion) that aren't regulated and charge higher interchange.

"Should interchange differential between the two tiers [of banks] be significant enough, merchants would have a strong motivation to 'steer' consumers away from using their community bank or credit union cards," the report states.

"Large merchants have been very successful in incorporating technology into their point of sale systems to steer consumers to use sometimes cheaper PIN debit transactions … such systems could easily be engineered to identify cards from more expensive small issuers and to prompt consumers to use some other tender type."

The Electronic Payments Coalition expressed displeasure with Durbin's amendment. "Consumers will pay higher fees, lose rewards programs and have limited choices for debit cards due to the disruption this amendment will bring to the economics of the debit card market," the coalition said in a statement.

According to the National Retail Federation, debit card interchange accounts for $20 billion of the approximately $48 billion banks generate in swipe fees each year. But for Adil Moussa, Analyst for Aite Group LLC, the effect of debit card interchange regulation on revenue is not as important as the fact that it sets a precedent, opening the door to regulation of credit transactions processing and thereby cutting into an even more important source of revenue.

"For banks, revenue from debit isn't really the first money maker," Moussa said. "It's the lending they do … the interest rates and the fees they're able to charge people for having [credit card] accounts. Those are really the first two main ones.

"We've already seen some regulation against charging outrageous fees on those accounts, so this is chipping away some more at bank revenues. What that's going to do is put a lot more pressure on the banks to come up with new fees that they will charge the consumer."

Prepaid's role in monetizing social media

Thursday, June 17, 2010

ith the game card sector of the prepaid card industry growing exponentially, it is becoming apparent how important prepaid cards are in helping online game and social networking publishers translate virtual services into real world profits.

Game cards act as a way for game card publishers to monetize digital content and interactive experiences, according to Dr. Joost van Dreunen, Lead Analyst and Managing Director at SuperData Research Inc. Game cards exist in "that intersection between traditional retail know-how and more modern, technology-based distribution models," he said.

For van Dreunen, game cards answer a fundamental question – how online game and social media publishers get consumers to spend money in virtual worlds and on networking sites.

"On the one hand you have the phenomenon of the emergence of virtual item sales," he said. "At the same time you have a growing number of game publishers and entertainment publishers which are primarily or almost exclusively online. How do you translate real money into virtual currencies?

"The gift card and the prepaid card business is very simple. … It really enables and opens up revenue to publishers in a way that they haven't been able to do before. So you see a lot of people adopt it as one of their payment methods."

Leveraging content

According to a SuperData report entitled Prepaid Game Card Primer: Monetization and Marketing for Stored-Value Game Cards, 2010 marks a large expansion in the game card market as game publishers like Zynga Game Network Inc. and Meteor Games LLC roll out game cards in retail stores. SuperData estimates that game cards will generate $55 million per month in 2010.

In May, social networking site Facebook and Zynga entered a five-year partnership. Van Dreunen believes the partnership is part of Facebook's strategy to monetize its content. While Facebook has hundreds of millions of users, it has struggled to generate revenue, he said. Facebook made money through advertising, but that dropped off when the recession hit.

Zynga, on the other hand, has effectively incorporated prepaid cards into its game mechanics, according to van Dreunen. "You can play and play [a Zynga game] and then you hit a ceiling unless you spend a little money," he said. "And they're very very smooth. And they've figured out the secret sauce when it comes to persuading customers to hand over a little bit of money."

Take a small-dollar purchase of a game card used on a Zynga game to buy a virtual tractor in FarmVille, for example, and multiply it by over 100 million users, and "that's a lot of money," van Dreunen said.

Facebook wants a percentage of that revenue, he added. "They want to be the platform that everybody goes to," he said. "And then they take 30 percent of whatever people spend. … They've been missing out on a lot of the revenue that [Zynga] has been making."

Metrics

Based on a survey of 3,152 prepaid card shoppers, SuperData found that the vast majority of game card users (76 percent) are between the ages of 13 and 17. That most gamers are teenagers plays into a primary function of prepaid cards – giving unbanked or underbanked individuals without access to credit or debit cards a tool for purchasing goods and services online.

"For game publishers, this means that by offering a prepaid card, they can gain access to a desirable consumer audience," the report said.

Additionally, prepaid cards offer retailers three main benefits, according to the report. Prepaid cards:

1. Create no inventory on balance sheets
2. Come without risk to merchants
3. Maintain their value

First, until a card is activated at the POS, it is not considered inventory from an accounting perspective. "This is radically different than most of a retailer's inventory, which must be acquired and shelved," the report stated.

Additionally, prepaid cards are useless to thieves until they are purchased and activated, which eliminates the risk of theft for merchants. Finally, prepaid cards, unlike other products, retain their value and never have to be marked down by retailers, the report said.

Van Dreunen sees the aggregation model for game cards as a growing trend. The trend is typified by the Ultimate Game Card, a product of PlaySpan Inc. managed by its subsidiary PayByCash. Money loaded on the card can be redeemed at hundreds of online gaming sites.

With limited retail space, "aggregator cards" are more practical than one card per game, van Dreunen said. Also, marketing a myriad of games under one trusted brand, such as Ultimate Game Card, allows game card buyers (such as parents) to purchase in-game credit for their children without having to know for what specific games, he noted.