Visa U.S.A. has announced results of a study that seems to confirm the association's earlier claims of significant savings from a set of system upgrades known as Payment Service 2000.
The study, conducted by Andersen Consulting, extrapolated the performance of five of Visa's largest members to estimate net systemwide savings of $58 million to $78 million in PS 2000's first year.
Visa imposed the new rules on retail store transactions in the United States with great fanfare in April 1993, saying fraud reduction, quality controls, and other efficiencies would pay immediate dividends to its members as well as to the entire card industry.
Among the changes, which will be introduced in travel-oriented and other merchant types this summer and expanded in stages around the world, were identification numbers on transactions stored by Visa to guard against invalid chargebacks, and requirements that the entire contents of a card's magnetic stripe be transmitted at the time of authorization.
The early cost-benefit assumptions met skepticism from MasterCard International, which preferred to attack 'the causes of fraud differently. And some Visa members wanted a reliable measure of the returns on the investments they made to comply with PS 2000 requirements.
Andersen, which has had a long and close relationship with Visa, calculated that card-issuing banks, merchant-acquiring banks, and third-party processors incurred PS 2000-related costs totaling $47 million to $70 million.
The investment level could only be estimated, as it varied according to a participant's system capabilities and other options.
Visa and Andersen said the aggregate payback, essentially double the initial investments, came from three areas:
* Fraud and counterfeit reductions through use of the card verification value feature of magnetic stripes -$30 million to $50 million.
* Improvements in Chargeback processing and customer service, and fewer requests for copies of sales documents - $35 million to $45 million.
* Higher interchange-fee income from tougher enforcement of the fees that apply to certain types of transactions - $30 million to $40 million.
"The majority of savings resulted from reduced exception processing and counterfeit fraud losses," said Joel P. Friedman, managing partner, strategic services for Andersen Consulting in San Francisco. "Financial institutions should expect additional benefits as they continue to change their business processes to take advantage of PS 2000 initiatives."
11% of Volume Audited
Rosalind Fisher, executive vice president at Visa, called the first-year results "impressive" and a "solid foundation" that will move the card-based payment system toward its goal of displacing cash and checks in the next century.
Andersen based its findings on detailed audits of five of Visa's biggest member banks - three on the card-issuing side of the business and two on the merchant- processing side. They account for 11% of U.S. Visa volume.
First Chicago Corp.'s card subsidiary, FCC National Bank, was the only one that agreed to disclose its association with the study. FCC National chairman and Visa board member Scott P. Marks praised the study and the program.
"We have experienced real savings as a result of PS 2000, especially in the areas of back-office management and fraud control," Mr. Marks said.
"Visa has offered us not just an academic exercise, but rather a payment-service foundation that will allow us to grow with future market trends," he added.
Richard Lonergan, a Visa senior vice president On the PS 2000 project, said some banks would have spent as much as $500,000 to $600,000 - typically $100,000 more than their regular MasterCard and Visa service fees - to gear up for the program. Those costs theoretically have already been repaid.
Not Visa Alone
Mr. Lonergan added that benefits will add up more slowly as PS 2000 spreads to airlines, hotels, car rentals, and other sectors that contribute smaller proportions of Visa volumes.
But Visa has not factored in the benefits of PS 2000 standards that have likely been applied to MasterCard, Discover, and American Express payments, which are believed to be significant.
A spokeswoman for MasterCard said she could not comment on the Andersen conclusions without a deeper understanding of the research.
But she said MasterCard has concentrated on eliminating chargeback and fraud categories that PS 2000 does not directly ameliorate, such as nonreceipt of sales documents.