t's all about the interchange. While interchange is calculated in cents, not dollars, those cents add up quickly considering that billions of electronic transactions are conducted each year in the United States.

Interchange fees, or more specifically, the way they flow, are at the center of a growing debate over scrip transactions. One scrip deployer has issued a legal challenge to Star, questioning why the network defines scrip as a point-of-sale, rather than an ATM, transaction.

"I've never heard it explained in a way that makes sense," said Dennis Ehling, a Partner with Kirkpatrick & Lockhart, the law firm representing California ISO EBT International (EBTI) in a suit against Star. "There doesn't appear to be a logical reason for why scrip transactions are treated as point-of-sale rather than ATM."

Scrip transactions are conducted at a point-of-sale terminal; a customer punches in his PIN and receives a voucher that can be redeemed for cash at the store where the terminal is located, along with a receipt detailing the transaction.

Visa, MasterCard and regional networks like Star have categorized scrip as a POS transaction for the past decade. As with all POS transactions, interchange in a scrip transaction flows from the acquirer to the card issuer.

ATM transactions, in which interchange flows from the issuer to the acquirer, are obviously preferable from a deployer's standpoint.

Walks Like a Duck?

Tom Lindell, President and Chief Executive of EBTI, contends that because scrip terminals support cash withdrawals, transfers and balance inquiries, they should be categorized as ATMs. While cash is not dispensed directly from a scrip terminal, he said the store clerk who exchanges scrip for cash in essence serves the same function as an ATM's cash dispenser.

Ehling found an April 1989 interpretive letter from the Federal Reserve's Board of Governors that appears to support Lindell's case. That letter, signed by an associate general counsel of the Fed, reads: "Staff does not believe that the use of personnel of the retail establishment in dispensing cash, as opposed to dispensing cash through the terminal itself, so distinguishes these transactions from withdrawals at ATMs as to warrant different treatment under Regulation D."

In a presentation he gave at an ATM Industry Association trade show in February, Tim Boccia, Visa U.S.A.'s Director of ATM Products, said that generally a cash withdrawal must occur at a terminal to fit Visa's definition of an ATM transaction. Visa defines an ATM cash disbursement as "a cash disbursement completed at an ATM, for which the cardholder's PIN is accepted."

When non-cash items such as stamps and tickets are dispensed from ATMs, those transactions are processed as POS rather than ATM transactions, Boccia said.

Scrip is "completely confusing to the cardholder" if it is treated as an ATM transaction, Boccia said. "If a cardholder goes to a scrip terminal in a fast food restaurant and gets a receipt, walks to the counter and uses it to buy food, then in his mind he's just made a purchase (rather than a cash withdrawal)."

Yet customers are not required to make a purchase to receive cash with a scrip transaction, Lindell said. "With a POS terminal, you have to make a purchase to get cash back, but not with scrip. That's clearly stated on all of our terminals. We do not restrict the way the customer uses his money."

Lindell said that Star training materials specify that POS terminals must support several transactions that scrip terminals do not, including PIN-less transactions and purchase refunds. ATMs and scrip terminals, unlike POS terminals, do not allow merchants to refund returned items or cancelled sales directly to a customer's account.

"(Scrip terminals) are ATMs and they should be treated like ATMs," he said. "If it walks like a duck and quacks like a duck, then it's a duck, but Star is trying to say it's a chicken."

A spokesperson from First Data, Star's parent company, said that "First Data is unable to comment on pending litigation."

According to Ehling, Star contends that Lindell's complaint, filed in United States District Court's Central District of California, does not adequately describe some of the allegations made to support his claims. Ehling plans to file an amended complaint later this month and expects the discovery process to begin in August.

"There is no way this (complaint) is not going to see a courtroom," said Lindell, who believes other scrip deployers may join his case. "The ATM industry stands to lose a lot of business if scrip isn't allowed."

Vested Interest?

Visa and other networks issued their rules regarding scrip in late 1992, just as they were beginning to promote PIN-based debit transactions, Lindell said. "I'd say that was a pretty anti-competitive reason for a rule," he said.

Neil Johnson, President of Texas ISO International Merchant Services (IMS), believes that a "vested interest" in debit may have influenced card associations' scrip policies. "Debit was available, but they couldn't sell it," he said. "Network rules are made to make somebody more money. When it becomes politically or financially expedient, rules change."

Johnson began deploying scrip terminals in 1992 when most networks still treated scrip as an ATM transaction. At one time IMS had up to 600 scrip terminals at retail sites, a number that has dwindled to about 100 today. Before scrip, he said, the only ATM option for retail locations was expensive, high-end machines. "Scrip gave us an opportunity to get into the smaller mom-and-pop locations."

At about the same time networks began categorizing scrip as a POS transaction, manufacturers Triton and Tidel introduced lower-priced, dial-up ATMs, Johnson said, which gave deployers and merchants "a viable alternative" to scrip.

Crack Down on Compliance

During his ATMIA presentation, Boccia indicated that Visa is trying to better address what he categorized as a longstanding problem: scrip transactions that are routed (knowingly or unknowingly) to Visa's Plus ATM network.

In those instances, he said, "The acquirers following the rules are harmed, the issuers are harmed and even cardholders are harmed."

Scrip transactions are allowed only in Visa's Interlink network, not Plus or Visa, Boccia said. Unlike Star and some other regional networks, Interlink does not allow deployers to collect a surcharge on scrip transactions. Boccia said that ATM interchange is meant, in part, to compensate acquirers for the higher costs of managing ATMs. Compared to POS terminals, the hardware itself is more costly, as is service and maintenance. ATM deployers also sometimes pay for cash replenishment, an expense that obviously does not occur with scrip terminals.

Interchange is "designed to balance the costs and benefits of transactions for all of the participants in a transaction," Boccia said.

Scrip Police

As with all compliance issues, the financial institutions that sponsor ISOs into the networks bear the responsibility for ensuring that ISOs follow network rules. Marilyn Kilcrease, President of Creative Card Solutions (CCS), a consulting firm that advises FIs on sponsorship issues, said "sponsor banks are doing everything they possibly can to comply," including adding language to ISO agreements indicating that ISOs will be immediately terminated if they operate scrip terminals as ATMs.

At sponsor banks' request, Kilcrease's company reviews ISO locations, looking for a large number of fast food outlets, which are popular sites for scrip. CCS has taken photos of suspected scrip terminals and sent the information to networks.

But the situation is difficult, Kilcrease said, because of the incentives ISOs and merchants have to deploy scrip terminals. Operating them as ATMs means the revenue potential is the same, despite lower operating costs. There is also less liability (due to lack of cash in machine) and fewer customer disputes (no misdispensed cash).

"Merchants want them, and cardholders use them. Processors generally cannot tell if it is a scrip terminal. With the current practice of ISOs becoming processors, it is an impossible situation," Kilcrease said. "Sponsor banks have no way of knowing; their only reliance is with the processor. While it is an issue with the networks, they only have so much in the way of resources to be scrip police."

Lindell's attorney, Ehling, believes the rules are not being strongly enforced and that some networks and processors may have chosen to ignore scrip terminals operating as ATMs. "If they're flying under the radar, it seems to be OK," he said.

Lindell admits his company operated up to 1,000 scrip terminals as ATMs. He claims that three different companies that processed transactions for EBTI were aware of the practice.

Ron Schuldt, Chief Operating Officer of Columbus Data Services (CDS), said his company was not aware that Lindell's terminals were scrip terminals until CDS was contacted by Star and asked to investigate.

The terminals were manufactured by Lipman, a company that produces both POS terminals and ATMs, and some of Lindell's terminals were ATMs. Before Lindell, CDS did not have any ISOs operating Lipman terminals, Schuldt said.

Lindell has the right to question the networks' rules on scrip, but he should follow the rules while doing so, Schuldt said. "He was running the machines wrong because it was more profitable to run them as an ATM. The right way to handle it would have been to run them right and file an objection with Star. If you're smoking something illegal, you can try to get it legalized-but you don't keep smoking while it's illegal." Triton, which manufactures a scrip terminal, modified its software in early 2002 to help processors differentiate ATM transactions from scrip transactions, said Bill Jackson, Triton's Chief Technical Officer. However, he said, "It can be circumvented by using old code. We don't support or release that, but it's out there."

He added, "The messages are the same in scrip as they are in the ATM world, so it's hard to tell them apart. Our change was a field to indicate the type of device. It works, but the processor must look for this."

Upping the Enforcement

Melanie Chewning, Vice President of ATM Services for transaction processor Lynk Systems, Inc., said networks are encouraging increased oversight of scrip as part of more stringent policies concerning ISO-operated ATMs.

Noting that "there are ways for people to get around the rules," Chewning said networks need to be more vigilant in their enforcement. Too often in the past, she said, networks have been slow to respond to reports of non-compliant terminals.

"I think everybody understands that the compliance process has to be pushed down to the processors and ISOs," Chewning said. "But we want the networks to take it seriously when it's pushed back upstream. If ISOs are going to play by the rules, they want to see the networks take action. They want a level playing field, and I just don't see that happening yet."

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