Visa Tightens Its Processing Grip

  Recent changes in Visa USA's processing rules left industry experts scratching their heads. Were the moves designed to maintain the integrity and security of Visa transactions, as Visa stated publicly? Or were they simply designed to build security around Visa's own processing business?
  Visa in February began notifying members that, effective May 15, all Visa authorization requests and clearing and settlement records representing Visa transactions, including member on-us transactions, must be processed through VisaNet. VisaNet is the Visa switch used to route transactions to the proper card issuers.
  On-us Visa activity occurs when the member is both the issuer and the acquirer in the same transaction. So by their nature, on-us transactions do not need what VisaNet is designed to do from a routing perspective.
  The new rule would also prevent a Visa member that uses a large processor for both its merchant and issuing processing from bypassing VisaNet when one of its cards is used at one of its merchant clients. In a somewhat different scenario, Visa in 2002 sued First Data Corp. for not sending to VisaNet certain transactions where First Data was the processor for both the issuer and the merchant acquirer.
  That litigation, including a First Data countersuit, is still pending. Visa's 2004 annual report notes that the U.S. District Court in San Francisco set an April 22 deadline for the discovery phase of the litigation. The court also scheduled a May 13 case-management conference, at which time it would set a trial date.
  A First Data spokesperson would not comment on the implications of the Visa rule change, though she says First Data could be effected. The spokesperson cited as an example Chase Merchant Services, which is an alliance member of First Data Merchant Services.
  Before J.P. Morgan Chase & Co. decided to switch to Total System Services Inc., or TSYS, to process Chase credit card transactions, Chase used First Data for both its card and merchant processing. So some on-us activity occurred when Chase cards were used at Chase merchants.
  On-us activity is not uncommon, particularly among regional issuers that also have a small acquiring presence in their markets, notes Les Riedl, president of Speer & Associates, an Atlanta-based consultancy. Industry consolidation, however, has extended the reach of such arrangements, he says.
  "Now they have become significant competitors to the point that they compete with VisaNet," Riedl says. "So it has become a bigger deal for the card associations to deal with."
  Tolan Steele, Visa senior vice president, says about 15% of total Visa volume is on-us and potentially could be processed outside of VisaNet, yet less than 1% actually is.
  MasterCard International does not have a similar routing rule, and a spokesperson says the card association does not require transactions to flow through its switch. However, members provide MasterCard with transaction data daily, she says.
  Riedl says Visa's decision to announce the routing rules was its way of reminding members it has similar policies already in place. "Is Visa ready to separate the brand from the processing and to differentiate these services and allow others to do the processing? This announcement suggests Visa's thinking is not there yet," Riedl says.
  Some Exceptions
  Steele says the Visa rule change is designed to ensure the Visa system provides members with the best value from the time a card is swiped to when the transaction is cleared and settled.
  "We're trying to align the brand product set and processing network," he says. "These things work best when they work together."
  The new Visa requirement does not apply to PIN-based Interlink transactions processed outside of VisaNet, to co-branded programs that feature private-label functionality or to programs that involve special arrangements with Visa.
  Some exceptions to the rule change involve cards that effectively are issued by a merchant, Steele says. He cites as an example Target's Visa-branded credit card, which is issued by a bank owned by Target. Target has a special arrangement with its acquirer so that Target card transactions initiated at Target stores are processed outside of VisaNet. The processor shares some of the data with Visa, though, to ensure cardholders receive any Visa Extras rewards points they may have earned.
  Visa will continue to allow processing outside of VisaNet if it is required under an existing contract. But after such contracts expire, transactions will have to flow through VisaNet. Visa members can apply for exceptions to the rule.