Merchants Get Gift Card Help From an Unusual Source: Visa

  Visa USA has begun helping a number of merchants process their proprietary gift cards over VisaNet, the card association's switch that routes transactions between merchants and card issuers or their processors, industry sources tell Cards&Payments. Within the past 18 months, they say, Visa has started allowing merchants to get authorizations for their gift card transactions via a VisaNet link to their gift card processors using nonVisa account numbers.
  While merchants save money by avoiding redundant phone lines and processor links, Visa's new arrangement to support nonVisa, "closed-loop" gift cards has caught many observers by surprise.
  "I haven't heard anything about it; not even a rumor," says Edward Lawrence, managing associate at Auriemma Consulting Group, a Westbury, N.Y.-based company that advises card processors.
  Visa will not publicly release the names of the merchants for whom it helps process gift cards or how long it has been providing the service. A Visa spokesperson would only say it has started to help process gift cards for a large number of companies, including a "leading leisure-and-entertainment company, a nationwide home-supply retailer and a worldwide hotel chain."
  Visa's attempt to keep the activity quiet has many scratching their heads. "Frankly, I'm a little baffled by that," says Tim Sloane, the director of debit advisory services for Waltham, Mass.-based Mercator Advisory Group. Last year, Sloane says he advised at least one high-placed Visa official that the company should take on processing closed-loop gift cards but was told that Visa had no interest.
  A spokesperson for MasterCard International declined to comment on whether MasterCard also had begun helping to process closed-loop gift cards, or if it planned to do so in the future. An industry expert familiar with Visa's program to help merchants process their gift cards says MasterCard is not supporting a similar initiative. "They're not there yet, but they sure will be," says the expert, who requests anonymity.
  In fact, the expert contends, it was a MasterCard policy change that prompted Visa to pursue the program. MasterCard about 18 months ago began to assess a one-quarter penny surcharge on MasterCard transactions acquirers route through VisaNet, which caused an abrupt shutdown in that activity, he says.
  "That's when Visa said it will take anything over its network to replace the subsequent revenue it lost when acquirers stopped routing MasterCard transactions through VisaNet," the expert says. "This could be a precursor to Visa's anticipated reload network for gift cards of all kinds."
  Other observers say Visa has a great deal of unused VisaNet capacity and might find it increasingly useful to broaden how the switch is used. "[Perhaps] it's trying to move into other lines of business that are connected to its core competency," Auriemma's Lawrence says, citing Visa's worldwide telecommunications network that can capture, deliver and authorize transactions.
  Although the use of merchant gift cards is dwarfed by the amount of money that changes hands through ordinary debit and credit cards, issuers of gift cards, especially closed-loop merchant cards, could experience significant revenue growth in the next few years. The National Retail Federation estimates that by 2007 consumer spending on merchant-issued cards will grow to about $59 billion from $48 billion in 2004.
  The federation also predicts that spending with "open-loop" cards issued by financial institutions and supported by major national card networks will grow to about $26 billion from $5 billion over the same period.
  Sloane and many other experts believe both Visa and MasterCard will make expanding the use of prepaid products, including gift cards, a top priority in the next few years. They also believe the card networks will concentrate, at least publicly, on supporting the burgeoning open-loop card market.
  REVENUE NEEDS?
  Visa's and MasterCard's member issuers do not generate revenue when closed-loop gift cards are used, so they do not see an advantage to support them, Sloane notes. (Proprietary merchant gift card users, though, may also use a debit or credit card if the prepaid card lacks sufficient funds to cover the total cost of the product purchase. Many consumers also buy gift cards using bank-issued debit or credit cards.)
  However, Visa's apparent move to help process merchant gift cards might be an indication that the card association sees its own advantages in doing so. Indeed, some observers point out that Visa has seen new threats to its bottom line.
  "The pressure from [merchant] lawsuits is forcing [Visa] to find new ways to generate revenue with the infrastructure it has in place," says Jeff Lewis, senior vice president of payment solutions for Milwaukee-based Metavante Corp., one of the nation's largest card processors.
  Thousands of merchants recently joined in suing Visa and MasterCard over what they claim are high interchange rates set by the networks. Merchant banks pay interchange to card issuers and pass the cost on to their retailer clients.
  Visa probably will stick with providing merchants with authorization and charging the small switching fee, says David W. Lott, a director at Collective Dynamics LLC, an Atlanta-based consultancy. Visa charges merchant processors about a penny per transaction switched through VisaNet, less with high volume, sources say.
  Unlike American Express and Discover, Visa has not spent years developing relationships with merchants directly. Other card companies also jumped into gift card processing long ago.
  AmEx, for example, processes gift cards for the national retailers Borders Books and Best Buy. Discover Financial Services' clients include Utix Group Inc., a Burlington, Mass.-based provider of prepaid cards that buyers can use at vacation resorts across the country.
  "If Visa is leveraging its rails in this space, well, we've done it for years," says Joe Hurley, Discover vice president for network strategic development. "But to be honest with you, I don't know what Visa is doing."
  Aside from its branded gift card and closed-loop cards issued for use at specific merchants, Discover also processes what it calls "semi-open," Discover-branded gift cards that are marketed for use only at specific locations, such as shopping malls. Hurley would not disclose the names of any of Discover's closed-loop gift card partners.
  Having the Discover brand on a card indicates a different functionality, Hurley notes. "Generally, when [customers] see the Discover mark, they feel like they can use it anywhere," he says. "So merchants with closed-loop gift cards prefer that Discover keep a low profile."
  VENDOR SUPPORT
  Although Visa is not forthcoming about its closed-loop arrangements, executives from other companies are more talkative. Gary Palmer, chief operating officer of Sunrise, Fla.-based eFunds Prepaid Solutions (formerly WildCard Systems Inc.), a leading processor of Visa- and-MasterCard-branded gift cards, says his company provides settlement services for companies that use VisaNet to authorize purchases made with their gift cards. Palmer cites Ace Hardware, Marriott International and Sheraton Hotels and Resorts as three examples.
  The three share a common trait, Palmer says. Each is a franchise operation with a multitude of owners that use a wide variety of point-of-sale systems. Without VisaNet, he says, building a gift card program would entail getting all franchise owners to use the same POS system. But with Visa's help, all transactions made with their gift cards are routed across VisaNet to WildCard for processing, Palmer says.
  It was WildCard, not Visa, that put these deals together, Palmer adds. "It's me and the banks that are signing up the retailers to do this," he says. "These are my customers."
  Marriott did not want to provide all the details of its program, but a spokesperson says while the hotel chain's gift card "does not have a Visa label, it has a Visa backbone." The POS systems in Marriott's hotels vary widely, the spokesperson adds, and "Visa ties it all together."
  A spokesperson for Ace Hardware uses similar language, saying the company's gift card uses "the Visa highway."
  By routing transactions through VisaNet, Palmer says, the franchise operations have to pay a little more to process payments than do other merchants. But the deals make perfect sense because they avoid having to change POS systems, so "the capital expenditure is zero," he says.
  While many merchants may resent Visa because of its interchange policies, Palmer says, WildCard's clients realize "they can't react viscerally to [working with] Visa. They need to make a practical choice."
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