By Ken Musante
Napa Payments and Consulting
Banks with less than $10 billion in assets are exempt from the Durbin caps on regulated debit Interchange. In 2011, when Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, there was tremendous disdain for large banks. Large banks were blamed for the Great Recession, and this bill was to protect America from large banks. Banks under $10 Billion were spared from the price controls.
Many smaller banks utilized the exemption to their advantage and established partnerships that leveraged the higher interchange they could make from debit transactions. Smaller banks are better able to capitalize on niche offerings that would not be meaningful to a large national bank.
Community banks make their living providing smaller or unconventional loans that are not cost efficient for large banks. Likewise, within the acquiring space, smaller banks have served high risk niches. These niches either are inherently too inefficient or are outside of the reputational risk for a large bank.
Smaller acquirers will have policies that support higher portfolio losses or higher chargeback or fraud ratios than large banks. Additionally, large banks have big box retailers to offset their portfolios and lower their overall ratios. Consequently, it is often difficult for smaller acquirers to meet some of the card network portfolio mandates that are applied to all acquirers.
Many years ago, Tim Jochner and I were successful in organizing a group of small banks formed to force Visa to revise its practices that would have squeezed small banks out of the acquiring market by enforcing a matrix of risk ratios based on capital. In Visa's eyes, absent the offsetting volume from big box retailers, our portfolio ratios were unacceptable.
All acquirers need to have a rational strategy, however, and certain actions have damaged the card networks and the individuals involved. Visa is taking action to better police small acquirers by implementing the Visa Acquirer Monitoring Program (VAMP). Within the United States., VAMP applies to all acquirers (not individual merchants), and targets card-not-present (CNP) activity.
Because smaller acquirers tend to not sign the really large CNP merchants, their ratios can be more volatile and worse than those of larger acquirers. Consequently, while VAMP applies to all acquirers, its impact will be greater with smaller acquirers. VAMP is intended to keep bad actors out of the ecosystem and protect the integrity of Visa's brand.
Within the United States, VAMP has ratios for disputes, fraud, 3DS and enumeration. Enumeration is when fraudsters attempt to use brute force to iterate their way to encoding a card's expiration date, AVS and CVV2. While both Visa and Mastercard have had merchant monitoring programs, VAMP applies to the acquirer's CNP portfolio, in total.
Like most programs, Visa's VAMP has early warning indicators and allows the acquirer a work out period for the first three months. After three months, the acquirer faces a $25,000 per month fee, which continues to increase to a $100,000 per month fee in month seven.
The VAMP dispute and fraud ratios will likely be the most often exceeded thresholds. The dispute ratio is 1 percent, based on the number of disputes. The fraud ratio is also 1 percent, but it is a more difficult threshold to monitor as the information is not always provided by the processors. Instead, the information is delivered via TC40 reports. I expect Visa to provide additional tools for acquirers as this program is rolled out.
In addition to the fees, Visa has a host of remediation requirements, which are meant to assist acquirers in improving their ratios. Like most remediation programs, however, the requirements themselves are taxing because they are designed to bring about change. Once an acquirer enters the program, it must have three successful consecutive months under the thresholds to exit the program.
The identification and remediation process also seeks to uncover the extent that a third party is contributing to the issue. If that is the case, actions could be further taken to limit the third party's control or the way the acquirer interacts with the third party.
A tree falls the way it leans; be careful which way you lean. Acquirers need to heed VAMP. Visa is a quasi-regulator for banks. All entities must comply with the rules, and failing to respect the new requirements will be costly. Acquirers should know their ratios for each of the VAMP measurements and have internal policies to ensure their sales goals are aligned with their operational requirements.
Acquirers need to work with Visa to ensure their internal monitoring is in line with how Visa is measuring their ratios and to have the tools and technology to quickly adjust. Sales need to be aware of VAMP and how it will impact the organization if they fail to maintain compliance.
Small banks have a place within the payments ecosystem. They are needed to ensure valid merchants have payment processing options. Knowing the rules will ensure they continue to thrive. 
As founder of Humboldt Merchant Services, co-founder of Eureka Payments, and a former executive for such payments innovators as WePay, a division of JPMorgan Chase, Ken Musante has experience in all aspects of successful ISO building. He currently provides consulting services and expert witness testimony as founder of Napa Payments and Consulting, www.napapaymentsandconsulting.com. Contact him at kenm@napapaymentsandconsulting.com, 707-601-7656 or www.linkedin.com/in/ken-musante-us.
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