his month's agreement between First Data Corp. and Visa U.S.A. to settle their respective lawsuits over First Data Net puts to rest a trend that threatened to upset the transaction processing applecart.

First Data had been growing First Data Net, a private network through which it could circumvent VisaNet by processing "on us" transactions. Visa filed suit in early 2002 to force the processing behemoth to put all Visa transactions through VisaNet, as contractually required. In late 2002, First Data filed a countersuit against Visa alleging anti-competitive and monopolistic practices limiting choice in the payments industry.

As part of the settlement, First Data will move its transactions with certain banks onto VisaNet, noted JPMorgan Chase & Co. Analyst Tien-tsin Huang in a research note July 3.

"The benefit and promise of First Data Net have significantly diminished in the last four years, with FDC losing major card-issuing business like JPMorgan Chase and Fleet since the suit started," he wrote. "The opportunity for FDC to leverage its STAR network to do more in PIN-debit land remains unchanged by this agreement.

"We believe the new agreement is a net positive for both firms, ... and a positive working relationship between the two is certainly better for the industry in terms of innovation."

When Titans battle, mortals get bruised

"I applaud the new senior executives of First Data for moving on to a more realistic approach to their role in the U.S. payments business," Robert Carr, President and Chief Executive Officer of Heartland Payment Systems, wrote in an e-mail to The Green Sheet. "It is time for our industry to look at other exceedingly wrong-headed strategies about growing revenues at the expense of the merchants who pay the bills."

Carr had been highly critical of First Data's earlier stance toward on-us processing. The lawsuit could have had "a draconian impact on all the non-FDC-owned acquirers," he wrote in the Dec. 23, 2002 issue of The Green Sheet (02:12:02). "A First Data victory in the lawsuit would mean that none of us would be able to compete for merchants processing any reasonable volume of business ..." he stated in the following issue (03:01:01).

"Transaction volume is going to continue to grow with or without this settlement," said Wayne Johnson, Transaction Processing Equity Analyst with Raymond James & Associates. "Both parties will continue to be successful."

Preserving the status quo

The settlement was more favorable to Visa than to First Data, said Dan Schatt, Senior Analyst with research firm Celent LLC. "It's unlikely anything innovative will come from [First Data and Visa] working together to lower costs. It preserves the status quo," Schatt said.

First Data has lost leverage since launching this battle, Schatt said. "Large card issuers have taken their processing capabilities in-house." He observed that First Data's focus on Western Union - slated to be spun off this year - has distracted First Data from its core business. Ultimately, the settlement strengthens Visa's position as it continues to grow. It's also a warning bell to others to reign in their on-us processing.

"This is the only logical outcome and hopefully is the beginning of a new reality in the U.S. payments industry," Carr wrote.