t's hard to believe, but another year is nearly behind us; this year, especially, the payment processing industry has experienced a whirlwind of significant events-many of them surprises. With all the filing, settling and appealing of lawsuits from Visa and MasterCard; acquisition announcements among major industry players; and the passing of the Check 21 legislation, it's turned out to be quite a busy year.

If asked to pick the most significant event of 2003, most people in financial services would probably agree it is the settlement in April between MasterCard and Visa and Wal-Mart and millions of retailers.

"This settlement has changed the landscape of the acquiring industry because all merchants and all MLSs now know who plays fair in the marketplace," said Bob Carr, Founder, Chairman and CEO of Heartland Payment Systems. "The chips are beginning to fall and the outcome will be dramatic.

"This settlement will intensify the decline of the large non-value add acquirers and give some of the smaller guys momentum to continue to take market share from the largest established acquirers who spend more time in the accounting department than in the customer service department."

Here's a recap: MasterCard and Visa were about to go to trial in an antitrust class action lawsuit over debit card fees filed nearly six years before by Wal-Mart, Sears, Roebuck and Co. and any other retailer that didn't choose to "opt out" of the complaint.

On the eve of the day the trial was set to begin, in an "11th hour decision" as the judge presiding over the case called it, MasterCard settled with the retailers. The credit card association did not admit to improper conduct but agreed to pay the retailers about $1 billion, reduce the debit card fees it charges them by a third and change its "honor all cards" policy as of January 2004.

Under pressure from not wanting to stand trial alone, Visa followed with its own settlement, agreeing to pay retailers $2 billion and also reduce its debit card fees and eliminate its "honor all cards" policy.

In December, Wal-Mart said it was dropping MasterCard-branded signature-based debit cards for payment, beginning Feb. 1, 2004-the first retailer involved in the suit to choose to accept one signature-based debit card brand over the other.

It turns out Visa and Wal-Mart have negotiated a deal in which the discount retailer will be charged lower fees than it was charged previously for Visa signature debit transactions (see "Wal-Mart Drops MasterCard Signature Debit" on p 72).

"It appears that Visa resolved a lot of issues with this settlement [with retailers]," Carr said. "In what might appear to some as 'unintended consequences,' it looks to me like Visa crafted some very positive results out of a very negative situation.

"The $2 billion dollar settlement hurt Visa a lot, but Visa was smart enough to get a clear path to meeting its long-term goals with the last minute changes in the settlement deal...Visa was able to get important issues behind them without compromising the future of their brand."

Momentous Mergers

In early September, Innovative Merchant Solutions (IMS), provider of credit and debit card processing services for small businesses, surprised everyone with the news that Intuit, Inc. would acquire it for $116 million.

Intuit is best known for its flagship software products such as QuickBooks and Quicken, so the question was raised: What does an accounting service provider have to do with merchant services?

It turns out Intuit has a growing merchant account services base of nearly 40,000; it is looking to expand that number significantly by acquiring IMS and integrating its QuickBooks offering with various point-of-sale solutions.

Joe Kaplan, President and CEO of IMS, was asked to join the combined company and continue to lead the IMS team and all of IMS' 110 employees.

"If the Intuit deal isn't already turning heads in banking and payments, I think it should be," Patti Murphy, President of the Takoma Group, wrote in her October column, 'An Insider's Report on Payments,' in The Green Sheet.

"Intuit has set its sights on becoming a major provider of financial services in a market segment that long has been ignored by traditional providers (read: banks), sole proprietorships and other small businesses. It may not own a bank, but it doesn't really need one to grow and prosper in this market. A merchant services company should suit its needs for entree to the payments system just fine."

The most significant acquisition announcement by far came earlier in April: Payment processing powerhouse First Data Corp. proposed a $7 billion merger with its smaller competitor Concord EFS, Inc., arguing that the acquisition would enable it to better compete with Visa and MasterCard's signature-based debit card networks.

First Data would combine the NYCE network with Concord EFS's STAR network, through which both PIN-based and ATM transactions are processed (NYCE is the third largest network and STAR is the largest). By joining these two networks, analysts speculated that the combined companies would control nearly 70% of the market. And in late October, the U.S Department of Justice Antitrust Division and seven states filed a lawsuit seeking to block the deal. The DOJ claimed the combined companies would reduce competition among PIN debit networks and increase prices for debit card transactions.

"I think one message the government was sending...is that it's not going to be okay for this market to concentrate power in the hands of a few large organizations unless there are some serious checks and balances in place to protect choice," she said.

On Dec. 15 First Data reached a settlement with the DOJ. According to the agreement, First Data will sell its 64% stake in NYCE. Pending shareholder approval, the merger will move forward.

Perhaps the most talked about incident of last year (2002) was the FTC investigation of Plano, Texas-based Certified Merchant Services (CMS).

It was the first federal complaint against an ISO for unfair and deceptive practices related to the marketing of credit card and debit card merchant accounts to small businesses.

CMS settled with the FTC at the end of 2002, and then took great steps to improve its business under the guidance of Mary Dees, President of Creditranz.com and current ETA President. Dees acted as sole Receiver for CMS through the later part of the FTC investigation and was appointed General Manager of CMS at the time of the settlement.

On Oct. 27, 2003, Fort Worth, Texas-based First American Payment Systems, L.P. announced the acquisition of CMS. The deal closes 18 months of scrutiny and rebuilding for CMS, and establishes a new beginning for it as part of a new company with a new name.

Check 21 Becomes Law

The Check Truncation Act for the 21st century, or Check 21, is legislation that was signed into law on Oct. 28. This law (when it goes into effect in 2004) will allow banks to transmit electronic images of checks instead of the actual paper checks, if desired.

"In the past few years, our industry has been distracted with developing technology to convert checks to something else, but a non-check based solution that works for both merchants and processors really hasn't come about," said J. David Siembieda, President and CEO of CrossCheck, Inc.

"Check 21 keeps checks in the 'check world' and offers banks a more affordable and faster way to move checks through the payment system. We are going to see a lot more imaging technology being developed that will link merchants to banks. For check guarantee businesses, Check 21 offers a check-based, not ACH-based, solution that will extend the life of the check and eliminate the underwriting worries that come with current conversion technology."

New Association - Especially for the MLS

If you're an independent agent or contractor in the financial services industry, and you think you're unrepresented, think again.

In case you haven't heard, the National Association of Payment Professionals (NAOPP), a non-profit organization for independent sales contractors-or merchant level salespeople (MLS)-in the financial services industry, held its first official membership meeting October 10, and more than 50 people attended. The idea for this meeting started in conversations among peers and as a discussion on The Green Sheet's MLS Forum; then it moved to louder rumblings and finally a number of motivated professionals met in February to get something started.

The NAOPP has indeed taken off-it has a Web site (www.naopp.com), and its next meeting will be held Feb. 3, 2004 in Mt. Snow, Vt.

Changes at the ETA

The Electronic Transactions Association (ETA), a trade association serving the needs of organizations offering transaction processing products and services, re-organized this year and hired association management expert Carla Balakgie in May to serve as its first full-time Executive Director; it also moved its headquarters from Kansas City, Mo. to Washington D.C. two months later.

In its new location, ETA intends to promote advocacy for the payment industry through the development of better relations with industry, governmental and regulatory agencies.

"ETA had grown and evolved in its developmental cycle to where the [leadership] wanted to do things differently-to bring in a new level of resources, including the management approach and the move to Washington with increased access to government and other agencies," Balakgie told The Green Sheet in a July interview.

"They were ready to move to the next level. I was hired to build on the superb foundation that was already in place. I will be enabling this organization to succeed."

Payment Company Ends IPO Drought

During the last two years, the number of companies going public dropped off significantly from the dot-com craze in the mid- to late 1990s through 2000. In fact, in the first few months of 2003, the number of companies that went public was zero-marking the slowest IPO market in nearly 30 years. That is until iPayment, Inc. made its initial public offering on May 12 (with 6,532,700 shares trading hands) and raised nearly $80 million. iPayment provides credit and debit card-based payment processing services to small merchants. As of November, the company reported it had a merchant base of more than 70,000 merchants.

Goodbye and Hello

The payment processing industry witnessed several surprise changes in command this year. Hypercom Corp. founder George Wallner left Hypercom in September. He resigned from the Board of Directors and no longer will serve as a consultant to the company. Wallner sold 7 million shares of his personal Hypercom stock.

He also signed a "non-competitive agreement" that prevents him from using proceeds from the sale of his stock to create a competing company or competing technologies during the next year. We're curious what Wallner will come up with in the next several years.

In addition, Eula Adams, former Senior Executive VP for First Data Corp. since 1991, left First Data March 1 to "pursue other opportunities." Adams is now a member of Pay By Touch's Board of Directors. Pay By Touch (formerly known as Solidus Networks, Inc., which acquired Indivos Corp. in April) was founded in 2002 and provides biometric authentication at the point-of-sale.

As well as Adams, Pay By Touch has a seasoned group of senior executives and board members from the technology and financial services industry. It also received $10 million in financing in October, so it will be interesting to see how far the company will go.

Economy Recovering

With everything else going on, the U.S. economy appears to have been quietly recovering from a recession, which began in March 2001 (although as of press time there was discussion of this date being revised to the third quarter of 2000) and ended eight months later. In July, the National Bureau of Economic Research (NBER), a private, nonprofit economic research organization, announced that the recession officially ended in November 2001.

Although jobless claims rose steadily throughout the first half of 2003, and only in the last three months have they begun to improve fractionally, record-low interest rates and multiple tax cuts added a boost to the economy, according to economists, by helping businesses and consumers spend and invest more. And short term interest rates are expected to remain steady.

Real Gross Domestic Product, the monetary value of all the goods and services produced by an economy over a specified period, made modest gains in the first and second quarters; but in the third quarter, the U.S. Department of Commerce reported GDP roared ahead at an annual rate of 8.2%-the largest growth by the U.S. economy since 1984.

In addition, consumer confidence clambered in November to its highest level in more than a year, according to the Conference Board's Consumer Confidence Index. The private research firms's index increased to 91.7, up from 81.7 in October.

The Green Sheet: 20 Years Young

And finally, The Green Sheet marked an important milestone this year when it celebrated its 20-year anniversary in October ("Is It 20 Years Already?" October 8, 2003, issue 03:10:02).

We've received many letters of congratulations and anniversary wishes from our readers and given all of the stirring events this year, it would suffice to say that 2003 has been the most exciting year yet.

Thanks for being with us, and we look forward to another successful year in 2004!