rom a temblor-like shakeup of card Association foundations to an enigmatic, grand-scale security breach, 2006 relandscaped the payments world.

As the card Associations shed old habits, national merchants and consumers alike tested new payments modi operandi: card waving instead of swiping; lattes bought on credit; Google as a payment vehicle; and loyalty cards multiplying like rabbits in wallets.

Changes were apparent in terminology, too. MasterCard International became MasterCard Worldwide and morphed into a corporation by taking itself public in May.

In October, Visa International said it would follow suit, announcing plans to unify its continentally partitioned organization and dissolve its current member-bank structure to become a corporation. Once this occurs, the term "Association" will be industry history.

Bleak house of bankcards

A class-action lawsuit filed by a coalition of convenience stores, drug stores and community grocers against card Association interchange fees lurched along. Pumped into action, Congress heard merchants' complaints and convened committees. But lacking the political will to legislate interchange controls, representatives and senators simply harrumphed their views on rate-setting.

A sparsely attended post-Valentine's Day House subcommittee session on interchange was anything but a love-in. "The success of the banks' legally suspect practices has given them tremendous market power," said Edmund Mierzwinski, Consumer Program Director at U.S. Public Interest Research Group.

Expressing the contrary view, lobbyists for the Electronic Payments Coalition and others urged lawmakers not to impose rate controls.

In July, bipartisan members of the Senate Judiciary Committee messengered engraved invitations to the legal counsels of Visa and MasterCard for a hearing on interchange policies.

Senators expressed displeasure with merchants' powerlessness over bankcard acceptance terms and then held the attorneys' feet to the fire.

While no legislative action was forthcoming, Congress' sudden interest in rate-setting had the desired effect: The Associations did an about-face on some policies, making their interchange rates public shortly thereafter.

The long, unwinding road

In April, merchants added debit cards to their class-action lawsuit against Visa and MasterCard credit card interchange fees.

The Associations see unwinding their member board structures as a way to preempt future liability from merchant lawsuits. They will then strive for shareholder profits over bank revenue, liberating rate-setting in the process.

While most ISOs looked for cover in the spat between retailers and the card Associations, a few championed the former. In September, Bob Carr, Chairman and Chief Executive Officer of Heartland Payment Systems Inc., debuted the Merchant Bill of Rights ( www.merchantbillofrights.com).

And in November, Paul Garcia, Chairman and CEO of Global Payments Inc., suggested in a public forum that investors petition the card Associations "to drop interchange immediately."

Meanwhile, merchants waited to learn whether the federal government will devour a chunk of their $3 billion proceeds from the Wal-Mart suit, settled in 2003. It threw out the card Associations' "honor all cards" rule. Negotiations between the plaintiffs and the government, which filed a claim at the beginning of 2006, were set to conclude Dec. 22.

Approximately 1 million settlement checks have been sent to date, but many of those were divvied up among multiple merchants, such as franchisees, according to Lloyd Constantine, Lead Counsel for the plaintiffs.

Payouts averaged $1,000 per recipient, he added. Some have received millions of dollars, and 35,000 merchants are expected to receive less than $5 apiece. The actual number of merchants involved could be as high as 2 million.

Discover plays its cards

Discover Financial Services LLC, a unit of Morgan Stanley now operating as a full-fledged bankcard brand, inked agreements in the latter half of 2006 with major processors. The deals enable ISOs to bring to merchants an integrated card-processing package including Discover.

The company's simultaneous agreement with JCB International means ISOs can deal a four-suit deck of bankcards through one processing arrangement: Visa, MasterCard, Discover and JCB. Talk about Texas Hold 'Em.

Carrots and sticks

While fighting for market share on other fronts, the card brands have teamed up on security issues. The aforementioned brands, plus American Express Co., make up the newly formed Payment Card Industry (PCI) Security Standards Council, which, as its first order of business, issued a tougher version of its standard.

The council's creation coincides with Visa's and MasterCard's tough-love approach to PCI: leveling fines this year for failure to secure the POS before breaches occur.

But it hasn't been all stick and no carrot. Visa announced this month it will distribute up to $20 million to the acquirers of level 1 and 2 merchants who validate PCI compliance by Aug. 31, 2007, without a breach. And Visa will link tiered interchange rates to compliance.

Data security breaches were on the minds of acquirers this year. The radioactive fallout from one or more 2005 breaches made the payments industry reach for its haz-mat suits: CardSystems Solutions, now owned by Pay By Touch, settled with the Federal Trade Commission this year over a breach at that processor that reportedly put 40 million card accounts at risk.

Although he didn't name the company, Hector Rodriguez, Visa Director of Payment System Risk & Compliance, said in October that a huge processor breach has had a silver lining: It spurred compliance-assessment companies to get tough on their clients - something akin to biting the hand that feeds them - making merchants work all the harder to obtain PCI compliance.

A year after a retailer- or ATM-related PIN debit breach occurred, financial institutions (FIs) and the government still have released little information about it. In March, OfficeMax vehemently denied it was the source, as widely reported in the press.

Yet its subsequent filings with the Securities and Exchange Commission acknowledge its connection to the matter being investigated by the feds and the company's stance that a processor was at fault: "While we have no knowledge of a security breach at OfficeMax, it is possible that information security compromises involving OfficeMax customer data, including breaches that occur at third-party processors, may damage our reputation."

The industry took note as several banks reissued debit cards en masse early this year on accounts deemed at risk from the breach.

Visa stepped up its communications efforts, frequently issuing alerts to merchants, cautioning them to protect their card data systems from hackers, thieves and unscrupulous employees. Recent alerts focused on Internet-protocol system basics: use of firewalls, passwords and encryption.

Risqu$#233; business

This year, high-risk processing became an ever-hotter potato. The industry took the lead in trying to curtail illicit activity funded through the card networks. In March, executives from 18 FIs formed the Financial Coalition Against Child Pornography, banding together with the goal of eradicating the scourge by 2008.

Also, Congress and the federal government cracked down on high-risk processing. In October, legislators enacted the Unlawful Internet Gambling Enforcement Act of 2006.

Several processors immediately fled this business category, lest they get the treatment dealt David Carruthers, CEO of UK-based gambling Web site BetOnSports.com. Arrested en route to Costa Rica in July, while on layover at a Texas airport, he faces federal racketeering charges for accepting wagers from U.S. residents.

The feds also pursued a high-volume telemarketer of nutritional supplements, Berkeley Premium Nutraceuticals, filing an indictment in September against its executives for alleged credit card and bank fraud. The government seeks repayment of $100 million. The telemarketer allegedly duped several processors into issuing merchant accounts time and again.

Payments: A widening definition

Perhaps the widest-impact change this year was the expansion of alternative payment networks, methods and form factors. Google made strides with its Checkout online payment service after its July launch, landing a few big retailers, such as Toys "R" Us.

However, while it signed numerous smaller and boutique e-tailers, it failed to score most of the top, online apparel merchants or the brick-and-mortar leaders with strong Internet sales.

Debitman, now two years old, renamed itself Tempo Payments Inc. and landed a patent for its merchant-branded consumer debit card transactions settled via the automated clearing house (ACH) network.

FastLane, a driver's license-based payment, loyalty and gift-card system launched in April by Combined Payments Inc., also clears through the ACH.

Alternative payment systems made inroads: Bill Me Later, Google Checkout and PayPal are said to have accounted for 18% of online holiday purchases on Black Friday this year at GSI Commerce's partner sites using those services.

Threatened by these new payment venues, traditional bankcard brands did not stand still. In fact, MasterCard and Visa raced to seize the small-payments market.

In April, Visa tossed out its signature requirement for most purchases below $25, to capture some of the $750 billion in such consumer spending, half of which is still in cash, according to Visa.

Meanwhile, MasterCard pushed consumers toward its PayPass contactless credit and debit program, issuing 11 million PayPass devices by November. Some 36,000 merchant locations worldwide now accept PayPass.

Special initiatives introduced the readers to sports stadiums and put new form factors, such as wrist bands and watches, on the arms of event attendees.

Not to be outdone, Visa created a mini contactless card, small enough for a keychain.

In addition, the industry began buzzing with the phrases "near field communications" (NFC) and "mobile payments." Recent trials started issuing PayPass-equipped NFC cell phones to customers of some 7-Eleven stores.

NFC delivery of coupons to cell phones is on the horizon, too. And Bank of America Corp. began enabling contactless acceptance at vending machines and testing contactless payments via cell phone.

While widespread adoption of NFC and mobile phone payments remain in the distance, contactless is poised to take off now.

The hitching post

No look back at the year in payments would be complete without a mention of the marriages, divorces and remarriages of some of the industry's giants. ISO Verus Financial Management Inc., which put itself up for sale, exchanged vows with accounting-software giant Sage Group plc in January.

In May, iPayment Inc., struggling to maintain its stock price, took itself private - the corporate equivalent of getting itself to a nunnery.

In the wake of Sarbanes-Oxley rules for exchange-listed entities, some small, publicly traded companies are finding SOX's accounting requirements too great a burden to bear.

In a restaging of "Kiss Me Kate," VeriFone convinced its onetime rival Lipman Electronic Engineering Ltd. to join it for November nuptials, creating a supplier powerhouse with over half of the U.S. market for payment systems.

Known for its strong service, VeriFone got quite a wedding present: Lipman's assets in the wireless equipment arena, a hot spot for future growth.

NOVA Information Systems Inc. hoisted a ladder in March and eloped with First Horizon Merchant Services' processing portfolio, giving Nova a combined total of 850,000 merchants representing $150 billion in processing volume annually.

Bank of America Corp. and National Processing Co. parted ways in September. Predicted for months, the split left NPC ready for a new lease on life with Iron Triangle Payment Systems (now NPC), which acquired the ISO unit. In the process, NPC got back its maiden name, but BofA walked off with the dowry - a host of national merchant accounts.

Also in September, First Data Corp., father of the bride, spun off Western Union. The 155-year-old former telegraph company was finally deemed old enough to stand on its own two feet. It went public Oct. 4. All in all, a landmark year: WU discontinued telegraph service, completing its transformation to a financial services firm.

To see how the top five processors rank after the year's landscaping changes, see "Card payments under the microscope," GSQ, December 2006 (Vol. 9, No. 4).

A bang-up year

In rounding out this retrospective, we'd like to mention a few feathers The Green Sheet Inc. stuck in its cap in 2006. For a fifth straight year, the company received several APEX Awards for Publication Excellence.

Readership of the Web site, which received a Grand Award, has jumped at least 20%, getting an average of 3 million hits a month. The magazine adopted the tag line "Dedicated to the Education and Success of the ISO and MLS," to better describe our singular focus.

And we'd like to announce a project that has gone from fledgling to flyer: The Green Sheet launched RodsandWheels.com in July.

It's a Web site reflecting The Green Sheet President and CEO Paul H. Green's passion for hot rods and vintage, classic and antique cars. Designed as the Web portal for car clubs and enthusiasts, RodsandWheels.com began to gain popularity in August among classic-car fans. It now gets as many 25,000 hits a day.

The site is updated daily by RodsandWheels staff. You can read more about the site in "RodsandWheels: Speeding into a new realm," in this issue of The Green Sheet.

You can also tune in to RodsandWheels' latest happenings on Hot Rods & Heels Radio (formerly High Octane Radio) at www.radiofreenashville.org Tuesdays at 11:50 p.m. EST. And be sure to visit www.RodsandWheels.com

Thank you for relying on our resources through the twists and turns of the past year. And keep your seat belts on for the drag race that the payments industry is sure to be in 2007.