ow! That is my reaction to the two rounds of incredible changes announced by Visa on June 19 and on June 25, 2003. There is a lot of "rearranging" going on as we speak, and I will cover as much of it as possible in the second part of this article. But first, let's examine (as promised in Parts I and II) the shrinking market share of our industry's number one company (in terms of size), First Data, as well as a couple of the other very large players in the acquiring industry plus the market-share gains in recent years of some smaller players.

The Shrinking Market Share of the Industry Leader

All of the data I am using in this review is from the Nilson Report, Issue 639 of March 1997 and Issue 783 of March 2003 (along with facts about portfolio ownership changes during the past five years). These two Nilson issues rank the reporting merchant acquirers by "owned volume" for 12/31/97 and 12/31/02, respectively. So what has happened in the last five years?

Actually, quite a bit has happened. The acquiring business was owned 100% by member banks from its formation in the 1960s until Nabanco was formed in the mid-'70s and began gaining traction (revenues growing beyond eight figures) in the very early '80s. From the early '80s through the early '90s, the industry consolidated rapidly, and this consolidation continued until it abruptly slowed when NOVA acquired PMT in 1998. Let's see what has happened since then.

On 12/31/97, First Data was still singing its "bank-centric" song in a big way, having purchased both CES (the spinout of Citibank's portfolio combined with the business of the infamous Peachtree, aka Harbridge) and Nabanco in 1995.

First Data's story back then was that it did not intend to compete with its hundreds of bank clients in the acquiring business and therefore would "distribute" the CES and Nabanco contracts to its newly formed "alliance partnerships."

The "alliances" at the end of '97 were (in order of size) Chase, Bank One, Wells Fargo, Unified Merchant Services (NationsBank plus others), PNC Bank, Cardservice International, Wachovia, Norwest, Barnett, Boatman's, Bank of Hawaii, Huntington, BankBoston and Old Kent Bank. These "alliances" plus the FDC portfolio itself processed $232 billion of the nation's $602 billion transactions, representing 38.5% of the market. (Nilson's total of $580.89 billion does not "foot" to the detail.)

By the end of 2002, many of the "alliance" banks had been merged with other banks, some of which also were "alliance" banks. When the surviving bank was not an "alliance" bank, such as Fleet's acquisition of BankBoston and Bank of America's merger into NationsBank, the "alliance portfolio" remained with First Data. Also during this five-year period, FDC continued its acquisition program by increasing its ownership and control of the few remaining "alliances" and making outright acquisitions such as BP Petroleum's (formerly ARCO's) payment platform.

Do Six of 1,400 Client Banks Really Constitute a "Bank-centric" Model?

By 12/31/02, only four of the original "alliance" banks remained and two new banks, SunTrust and Sovereign, were added. Also, First Chicago NBD had been taken over by Bank One. The market share in 1997 of all of these entities combined was $238 billion, representing a market share of 39.5%. Five years later, the First Data-controlled business claimed ownership of $381 billion of the nation's reported $1.2 trillion of volume, or just 31.4%. This is a drop in market share of 20.5% (39.5% to 31.4%) in just five years.

Furthermore, four of the six "alliance banks" (SunTrust, PNC, Bank of Hawaii and Sovereign) are partnered with FDC on less than 10% of this $381 billion. All of the rest is owned directly by First Data or in "alliance" with either Chase and Wells, both huge non-acquiring clients of First Data who have larger fish to fry with their outsourced partner than the relatively small marketplace of merchant acquiring (compared to card issuing, etc).

If First Data and two of its largest non-acquiring clients control more than 90% of the First Data business, I wonder how First Data's other 1,394 bank clients (see www.firstdata.com/news_factsheet.jsp for FDC's claim to have 1,400 bank clients in total) feel about First Data's so-called "bank-centric" acquiring model?

Is First Data hiding behind the skirts of Chase and Wells so it can still claim that is has a "bank-centric" model that spurs competition across the land? The numbers speak for themselves. The new business coming directly from the bank channel is hardly a growth engine for First Data. Eight years of results have proved that First Data's approach to an "alliance" strategy is simply not viable as a growth engine.

So How Can First Data Meet Its Strategic Objective?

So how is First Data going to accomplish its much promoted Strategic Objective: "To process every electronic payment transaction worldwide from the point of occurrence to the point of settlement."? It may appear to some that FDC has embarked on a new strategy to replace the "alliance" model. One approach may be to work to gain a monopolistic advantage over the competition, which on 12/31/02 controlled the remaining 68.6% of the U.S. market.

With the effort to establish the monopoly called FDCNet, First Data would be able to increase its acquiring market share by eliminating dues and assessments and other fees (for itself only?), thereby gaining a monopolistic advantage over the rest of the industry in raw pricing power. Remember John D. Rockefeller controlling the railroads and therefore being able to establish the Standard Oil Trust? FDCNet could provide the railroad tracks FDC needs to control the U.S. acquiring market.

Alternatively, FDC's approach might be to purchase Concord and thereby gain a 70% market share of the PIN-debit networks. This would permit FDC to lay down a different set of railroad tracks and use them to gain acquiring volume by cutting debit interchange or network fees (for itself only?), as Concord has already done in the marketplace to win McDonald's business as well as the business of many other large merchants.

Yet a different route to hegemony for FDC-Concord is to deny access to their newly combined networks (aka railroad tracks) to eliminate their competitors' ability to offer a full-service payment service altogether. Anyone who understands merchant requirements realizes this is fatal medicine to the monopoly's competitors.

Let's hope the recently announced delay of the FDC-Concord merger approval will give the Antitrust Division of the Department of Justice enough time to examine these issues more closely. First Data's argument that it is competing against cash and checks and not the rest of those with a 68.6% market share is hard to take seriously. Its other argument - that there is more competition because of its "bank-centric model" - does not hold water.

In summary, some believe that First Data has lost confidence that it can compete effectively in an openly competitive marketplace for the merchant acquiring business. Is FDC working to create an advantage for itself that the rest of the competition cannot have? Is FDC attempting to use its power to lay any one of three sets of railroad tracks? Namely: (1) a monopoly to gain a price advantage with FDCNet; (2) a monopoly to gain a price advantage with debit interchange or network fees; or (3) a monopoly on access to the so-called "regional networks," which it will control if the Concord merger is approved.

Top Five Acquirers Losing Aggregate Market Share

But First Data isn't the only extremely large player with market-share problems. NOVA was a Top Five player in both rankings. During the last five years, NOVA purchased PMT and the portfolios of CoreStates and StarBank and then merged with USBank after its market cap plunged from its $2.4+ billion high to $1.5 billion. The aggregate market share of these consolidated entities has dropped from 11.7% in 1997 to 8.4% in 2002. So much for that roll-up strategy!

During this same period, NPC, also a Top Five player throughout this period, acquired the portfolios of Michigan National Bank as well as First of America but lost market share, dropping from 13.7% to 12.7% over the last five years.

The other top players in 1997, Paymentech and Bank of America, both have increased market share, but overall the Top Five players have dropped from 78.7% of the market in 1997 to only 68.7% of the market in 2002, a huge drop of 10%.

New and Growing Competitors

So is this primarily a consolidating industry, or is it primarily an industry with new players doing dramatic new things? There are three technology-leading players on the 2002 charts that were not ranked or even in existence in 1997 - Heartland Payment Systems, Lynk and Merchant E-solutions together owned almost $30 billion of volume by the end of 2002 and continue to outpace the growth of the industry by wide margins.

Additional new sales organizations and roll-up companies also have risen from nowhere - Merchant Services, Inc, iPayments and Verus combine to have almost $15 billion of volume. In addition, a large number of new, small organizations are showing up in the rankings. A study of all of the companies reporting to Nilson will show a plethora of stagnant payment providers along with a couple of big, growing companies such as Paymentech and FifthThird Bank.

But most interesting is the number of companies in the half-billion to several-billion-dollar volume category. The 10% market share that has been lost by the Top Five has been picked up mostly by a collection of these new entrants. Visa Announcements

On June 19, Visa released its "August 2003 VisaNet Business Enhancements Technical Letter" to all certified transaction processors. This letter is confidential and cannot be released. Six days later, Visa released its new rates, effective August 1, 2003. On June 4, 2003, MasterCard released its new rate structures.

Without getting into a lot of the specifics, a number of new constructs were introduced to the industry. Here are some of the high points of the announcements. You might want to sit down before you read this!

1. Visa Check rates will be 1.23% plus 0 cents. That's right. Visa implemented the required 48-basis-point decrease by eliminating the 10-cent discount per transaction fee and lowering the interchange rate from 1.25% to 1.23% for all but the supermarket category (which was lowered, as discussed previously). Just imagine what this is going to do for PIN-debit and small-ticket merchants!
2. MasterCard lowered its MasterMoney card rate to 0.97% plus 10 cents per transaction, from 1.40% plus 10 cents.
3. The new Visa Check card rates and the new MasterMoney card rates all apply to all categories of qualification. This means that beginning August 1, there will be no downgrade or unqualified transactions for card-not-present or tip-adjusted Visa Check or MasterMoney transactions. Many small merchants will be celebrating when they see huge "non-qual" surcharge fees drop off their statements. Many ISOs will wonder what has happened to their residual income.
4. Visa announced that it will increase assessments from 8.4 basis points to 9.25 basis points for all transactions effective October 1, 2003.
5. Visa announced increases to credit card rates of 4 basis points for card-present consumer cards and 5 basis points for card-not-present.
6. Acquirers for the merchants who dropped out of the class-action litigation ("opt-out merchants") will not receive the new rates for offline debit interchange. In fact, each such merchant must be identified with a new code - MVV (Merchant Verification Value) by the processor submitting the transaction to interchange beginning August 1.
7. Visa has introduced a New Visa Partner Program in which Visa will make special debit-pricing arrangements with individual merchants and pass the negotiated interchange fees to the acquirer for these merchants. Processors will be required to submit another new code for these transactions called a VPP (Visa Partner Program). This program is for PIN-based Interlink transactions as well as offline Visa Check transactions.
8. New interchange rates have been established for credit vouchers.
9. New fees will be assessed for chargebacks and draft retrievals.
10. Visa Check Cards issued by non-U.S. banks will not qualify for the new Visa Check rate but instead will be assessed credit card interchange rates.
11. Visa has created an entirely new set of rates for very large merchants and supermarkets. This new tier (Tier I) applies only to merchants processing more than 45 million CPS/Retail Credit tickets and $1.5 billion of volume or supermarkets who process more than 24 million tickets and $1 billion of volume. These rates are 4 basis points lower than CPS/Retail Credit (Tier II) of 1.43 plus 10 cents, the new base rate and 1.2% plus 0 cents for Tier 1 supermarkets vs. 1.2% plus 5 cents for the smaller (Tier II) supermarkets.

12. For credit transactions, new Verified by Visa rates (CPS/e-Commerce Preferred) will be 1.80% plus 10 cents vs. the CPS/e-Commerce Basic rate of 1.85% plus 10 cents when Verified by Visa is not available.

13. A new Visa "Variable Access Fee" of 0.5 cents will replace the current variable rate fee for all processors (this levels the playing field even more for the smaller guys).

In addition to all of this, rumor has it that Bank One is about to go to Interlink-bugged Visa Check cards only. Without a MAC or STAR bug on the card, the new FDC-Concord monopoly would not be able to participate in the PIN-debit revenue from these cards.

Word is that this may be the big banks' way of removing themselves from the threats of FDC's monopolistic efforts. This ultimately could be the salvation of the little acquirers.

A lot is happening these days. It feels as if the last 90 days have brought more turmoil to our industry than the last 10 years combined. More later.

Bob Carr is the Founder, CEO and Chairman of Heartland Payment Systems, the nation's largest privately owned merchant acquirer and ninth largest overall, with annual revenues exceeding $300,000,000. Heartland was recognized by INC Magazine as the 57th fastest-growing private company in America and is one of the 10 largest INC 500 companies. Bob was a Founder and Vice President from 1988 to '90 of the Bankcard Services Association, which has since become the ETA.

To learn more about Heartland, visit www.hpsteammates.com or www.heartlandpaymentsystems.com, or e-mail Bob at Bob.Carr@e-hps.com.