New Markets For 2004

  It's a new year, time for a fresh start. Let's get down to business. What are the growing payment areas for merchant acquirers? That question is already being answered by aggressive acquirers that have begun claiming their turf in several intriguing fields.
  Last year, one of the hottest topics was quick-service restaurants (QSRs), as card payments finally gained traction after years of tests in the fast-food sector. Many of the major acquirers have snapped up merchants in the $115-billion burger and submarine-sandwich market. Now, magnetic-stripe card readers are rapidly populating drive-through lanes nationwide.
  For 2004, handicappers betting on new markets believe health care may be a major consumer category that sees more card payments.
  As for plastic products, prepaid cards will continue to find consumer acceptance, according to observers. Finally, Joe Consumer will be switching more of his recurring payments to his credit or debit card account in place of writing a check.
  If health care can be cracked wide open, it will be huge. Spending on national health care was $1.3 trillion (with a "T") in 2000, the most recent year for which figures are available, according to the Health Care Financing Administration (HCFA).
  There are two parts to this market that might be described simply as wholesale and retail. The wholesale side is the enormous payments space where insurance companies pick up the costs for their customers.
  The retail side is the highly fragmented field of the individual health-care providers-doctors, dentists, optometrists and other professionals. Most providers either set up their own business or become part of a group practice with less than nine providers. In 2000, HCFA counted over 782,000 providers in the country.
  For an acquirer, making a living in the health-care retail market is somewhat like trying to gather pennies scattered on a marble floor. Often, the only card charge is the $10 to $20 co-pay that a patient must make for each visit to a provider. (Still, that relatively small fee is larger than the cost of your average meal at a fast-food joint.)
  One merchant processor is carefully clearing a path in this market. TransFirst Holding Co. LLC has grown into a $9 billion processor by buying processors and independent sales organizations, including Money Tree Services and the agent bank merchant-acquiring portfolio of Bank of America's BA Merchant Services unit.
  Dallas-based TransFirst also bought PulseCard Inc. in 2002 and turned it into its Health Services group with about $1.3 billion in volume this year, according to Andrew Rueff, vice president, strategic acquisitions.
  That's just a fraction of the potential market. Rueff says that out-of-pocket health-care spending by patients is $155 billion. Cards are used for only 18%, or $27 billion worth of those payments. The remaining $128 billion is paid for with cash, checks and miscellaneous other payment forms, says Rueff.
  "There's a significant market to be captured through competition and by displacing checks," he says.
  To do that efficiently, TransFirst partners with associations like the American Society of Cataract and Refractive Surgery and the American Society of Opthalmalic Administrators. Combined, the two claim a membership of about 8,000 eye-care professionals.
  TransFirst begins by processing members' dues and subscriptions to association publications, says Thomas M. Rouse, chairman and chief executive. That's the opening in the door to offering card-processing services to the providers, he says.
  TransFirst targets those medical fields where the insurance companies pay for a limited part of patient care. Optometry is a good example. Many insurance plans don't pick up the cost of a second pair of new glasses, contact lenses, and special surgery like a Lasik procedure, says Rouse.
  Another group is veterinarians. Pet owners who usually pay for a distemper shot with a check are candidates to switch to plastic, says Rouse. And on the business-to-business side, TransFirst is also working on medical-equipment supplies.
  Then there is still the wholesale side of health care. The opportunity here revolves around serving insurance companies, commonly called payers, as they exchange information with providers.
  America today probably has the biggest, most sophisticated medical system ever known to man. One benefit is the longest life span in history. Another sidelight is that providers are required to keep a paper record.
  The government has attempted to reduce some of the paper with the Health Insurance Portability and Accountability Act, or HIPAA, which went into effect in October. HIPAA is a step towards the automation and standardization of much of the information that flows between medical providers and insurance-company payers.
  Doctors have become pretty good when it comes to sending a claim form to a payer, with about two-thirds of these documents shipped electronically. But the paper shuffling seems to revert to the 19th Century when it comes to payers getting a response back to doctors.
  In fairness to insurers, every patient treatment requires a boatload of information to process. When an insurer receives a claim, it has to check the information, determine if it covers that patient for that treatment, figure how much it owes the doctor, determine how much the patient owes, then send the doctor a check along with thorough documentation of all this information. The insurer often sends the patient a bill or explanation of benefits, or EOB.
  Currently, less than 2% of this mountain of paper, called remittance advice, is sent electronically, according to Beverly Kennedy, senior vice president of health care with First Data Corp.
  The giant Greenwood Village, Colo.-based processor is always looking for transactions that can be made electronic. While this transaction isn't strictly the transmittal of money, processing is processing, according to Kennedy.
  "That's where we zero in," she says.
  The need is there because payers would like to cut their postage and printing costs. And providers, who may deal with as many as 40 insurers, would like to automate and speed their payments. Both sides would like to slash the estimated $250 billion it costs annually to administer the processing of the 35 billion transactions between payers and providers, says Kennedy.
  Last summer, First Data formed a marketing agreement with ProxyMed Inc., a Fort Lauderdale, Fla.-based information clearinghouse, or middleman, between providers and payers. The two have come up with a service for payers called FirstProxy Electronic Remittance Advice/Electronic Funds Transfer.
  FirstProxy will send the remittance advice information and reimbursements back to providers electronically. First Data also will offer its massive printing and mailing services for insurers that need to use the old-fashioned approach. In addition, FirstProxy will be a repository of information on these transactions that providers will be able to access through the Internet.
  Kennedy says FirstProxy is discussing the design of its system with about half a dozen payers and should go live in the first quarter.
  Insurance companies will be charged a fee per transaction. Providers will pay a monthly subscription to use the remittance-advice capabilities of the FirstProxy network. However, a basic version will be offered for free.
  First Data's size gives it the confidence to break into new markets with deals like FirstProxy. It may or may not succeed this year, but it could clear a path for other acquirers to expand into health care beyond simple patient co-pays.
  One card category that will surely see growth this year is prepaid. Partly that's because financial institutions find prepaid cards are an appealing way to reach the so-called nonbanked or under-banked consumer. Partly it's because more stores have offered the cards right at the checkout counter, a tactic that has paid off as prepaid becomes an impulse item.
  But prepaid will also see growth because more card products are falling under this generic name. Not long ago, prepaid meant a gift card for use at a single merchant. Today, the government, employers and insurance companies are using prepaid cards in place of checks. That can mean a prepaid card to pay a temporary employee, disburse child-support funds or make a workers-compensation payment.
  Prepaid Categories
  Recently, Visa USA looked at prepaid's potential as a payment category, adding up those areas where payments now made by cash and check could be replaced with a prepaid card. In total, Visa found prepaid could have been worth an estimated $2.1 trillion in 2003 (chart, page 12).
  The San Francisco-based association broke the prepaid space down into five usage categories. The largest was the government-to-consumer category where $689 billion in transactions were generated. Visa added up major federal and state government disbursements like Social Security payments.
  The second-largest category was business-to-employee payments with transactions totaling $555 billion. Here, Visa considered payroll and bonus cards and related payments.
  The traditional consumer-to-consumer category, including gift, campus, travel and other cards, was worth an estimated $517 billion.
  A skeptic could say that Visa's projections fit Visa's purposes. Still, prepaid cards are finding increasing favor with consumers. Needham, Mass.-based Tower Group projects prepaid will be worth about $500 billion worldwide by 2007, after generating $240 billion in payments in 2003.
  TowerGroup and other analysts have reported that prepaid's "pay-before" approach is rapidly joining credit's "pay later" and debit's "pay now" in the offerings from financial institutions.
  In 2003, acquirer and debit processor Concord EFS Inc. reported it had 100 payroll card clients, twice as many as in 2002. Clients include major retailers and six large temporary staffing agencies. Memphis, Tenn.-based Concord allied with Money Network in 2001 to issue the personal identification number-secured debit cards.
  The payroll cards allow employees to avoid lines, and fees, at check-cashing outlets. Employers cut out paper paychecks and encourage staff to sign up for direct-deposit programs, according to Money Network.
  For merchant acquirers, it's clear that prepaid systems and services must be in your quiver when calling on customers.
  Another growth spot for 2004 is recurring payments or what many now call bill pay. The category includes such regular payments as rent, utility and cable bills, insurance premiums and health-club dues.
  The category name began as recurring payments with the idea that a consumer would enroll with the biller so that his card was tapped every time the particular bill was due. And some consumers are doing that. But many consumers have opted to use their cards on a one-off or occasional basis as they see fit, according to Jim Eitler, Visa vice president of merchant sales.
  In 2002, bill pay generated $39 billion through Visa, according to Angela Brown, Visa executive vice president of acceptance. Visa estimates bill pay could be worth $800 billion, says Brown.
  The challenge is less with cardholders and more with billers, says Brown. "Consumers prefer to pay with a card because it's convenient and secure and it (builds up their) rewards program," says Brown. "Billers have to integrate it into their billing systems."
  That can mean a major investment in an upgrade. But Visa has a number of ways to break down a biller's defenses, say Brown and Eitler. Visa will work with its merchant-acquiring members to convince billers to make that outlay, the executives say. Additionally, Visa will invest time, and possibly money, to get a biller up to speed.
  Education
  The first step is educating billers on the benefits of getting their customers to pay with a card. One obvious plus is that an enrolled card can mean an on-time payment. Additionally, payment often is available four days faster than with a check, says Brown.
  Visa will evaluate a biller's payment system to determine what needs to be done to accept cards. For many billers, that's uncharted territory, says Eitler.
  "It's new. Many billers haven't taken cards before," he says. "This may be the first time they've dealt with an acquirer."
  Many companies may need operational support. "In some cases we may even write a check to help," says Eitler. He declined to name any companies Visa's helped but says Visa will pull out its proverbial card in those cases where the biller has committed to actively encouraging its customers to sign up for a regular pay-by-card.
  In the near term, insurance, telecommunications and cable companies seem to have the most desire and are furthest down the acceptance path, says Eitler.
  There are a lot of intriguing possibilities for acquirers this year. To a great extent, consumers have decided they prefer plastic to checks. In 2004, the challenge is convincing recalcitrant merchants that cards should replace paper.