Thursday, November 6, 2008

It's Global Warfare Against Visa/MasterCard

Visa and MasterCard recently paid $6.8 Billion collectively (pun intended) to Amex and Visa to settle their anti-trust lawsuits and  a couple of days ago I reported that the Department of Justice informed Visa and MasterCard they're under investigation again.

At last count, Visa and MasterCard has got Canada (Stop Sticking it To Us) the U.S (see previous post) and now even Europe (Stop Unfair Credit Card Fees) all battling Interchange Fees. (Australia won a couple years ago).   Looks like the whole world hates and is up against them...I'd be willing to bet that Visa and MasterCard are starting to know how George Bush feels...

European Interchange Fee battle escalates
MasterCard Europe recently introduced a new interchange fee structure for MasterCard credit and Maestro Intra European Economic Area debit cards to merchant acquirers.

But EuroCommerce, the governing body representing the retail, wholesale and international trade sectors in Europe, said MasterCard raised its interchange fees as much as 160 percent, which, according to EC, violates a December 2007 agreement to eliminate interchange at the POS. The European Commission and the EC are trying to determine if implementation of this new and reportedly unexpected fee structure is a violation of antitrust law.

Additionally, EC said merchants and consumers realized no savings during the fallback (period of no interchange for POS purchases) because banks refused to renegotiate acquiring contracts with merchants to reflect savings from lack of interchange.

Down Under dilemma

"Our merchants complained about the variety of excuses banks gave for not passing on the savings to them," said Xavier Durieu, Secretary General of the EC. "MasterCard said that the zero rate was only provisional and under appeal, so banks subsequently refused to pass fee reductions onto merchants and, ultimately, the consumer."

MasterCard cited Australia's decision in 2003 to eliminate interchange as a justification for its rate increases in Europe. The card network said eliminating inter-change Down Under was a boon to merchants, but consumers have paid almost $1 billion more since then as a result of increased annual fees and reductions of rewards programs.

Broken promises

The EC disputes MasterCard's position.

"We see such fee increases as a clear attempt by MasterCard to circumvent the Commission's decision against their cross-border interchange fees," Durieu said. "[MasterCard] is trying to recoup lost revenue by increasing fees without justification.

"And with the arrival of SEPA [Single Euro Payments Area - the consolidation of European payments into one platform], we need full transparency on all card fees; MasterCard's fee increases contradict European financial institutions' promises that SEPA would prevent price increases for cardholders."

MasterCard applied to the European Court of First Instance in March 2008 to annul the Commission's suggested interchange rates and said it reserves the right to change its rates at any time.

MasterCard's concerns with the Commission's decision focused on:

  • The Commission's failure to recognize that four-party payment systems (issuer, acquirer, cardholder and merchant) cannot operate without settlement terms between the issuing and acquiring banks, which require interchange fees.
  • The Commission's refusal to recognize the efficiencies of four-party systems and the fairness of MasterCard's interchange rates.
  • The Commission's inaccurate conclusion that MasterCard's interchange fees restrict competition under the EC treaty rules.
Javier Perez, President, MasterCard Europe, said "MasterCard firmly believes that market forces, not regulation, should drive interchange rates, as well as give retailers' choice over which payment forms to accept."

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Fighting Visa and MasterCard

In the ongoing quest to lower Interchange Fees, some small US biz owners have banded together to lobby for lower card fees.  Here's a story from today's NY Times regarding the fight:

Small-Business Owners Lobby to Cut Credit Card Fees -
Small-Business Owners Lobby to Cut Credit Card Fees

Small merchants have long chafed at the fees they must pay banks every time a customer swipes a debit or credit card. But now, with business slowing and every dollar important to their bottom line, some merchants are pushing for changes.

The merchants are lobbying for legislation that would compel banks to negotiate fees with them and are supporting a second measure that one of its sponsors calls a “credit card bill of rights for merchants.” At the same time, some merchants are seeking class-action status for litigation claiming antitrust violations by banks and the MasterCard and Visa card networks.

Alan L. Carsrud, professor of management and entrepreneurship at Florida International University in Miami, said small-store owners have little choice but to accept the cards. “If a mom-and-pop merchant doesn’t like paying them, it can’t just stop taking cards — it would bleed customers because Americans have been socialized to use plastic,” he said.

“Although all merchants are facing real problems about profitability,” he added, “this may be a life-and-death matter for the small ones.”

A typical merchant card payment has two parts: an “interchange fee,” which includes an average 1.7 percent of the sale price and a flat per-transaction fee, and a separate fee that goes to the merchant’s bank. Take, for example, a driver who pays for a $1,000 car repair with a credit card. The bank that issued the consumer’s card receives an interchange fee of $17.10 (including a 10-cent flat fee), while the repair shop’s bank gets $4, or four-tenths of 1 percent of the total sale. The repair shop pockets $978.90. 

Editor's Note: It's more complicated than that.  For example, there's not a "standard fee." ..the repair shop might have a rate of 2.25% and .15 cents or 2.00 and .25 cents... it usually depends on volume, average ticket and their knowledge of Interchange at the time they signed the contract.. 

In 2007, merchants paid $61.56 billion in electronic payment fees, up from $48.58 billion in 2005, according to the Nilson Report, a payment systems industry newsletter. The report estimated that lenders took in 82.5 percent of those dollars.

“What merchants are getting for their money is convenience, risk management and guaranteed payment,” said Denise Dunckel, a spokeswoman for Visa Inc.

Various factors make every interchange fee unique. If the magnetic strip on the consumer’s card does not work and a cashier has to enter its number manually, for example, a higher charge results. If the card “rewards” the consumer with cash back or airline miles, that, too, has a higher charge.

Beyond setting fee schedules, card agreements also reach into merchants’ daily operations. Merchants who take cards are supposed to accept them for purchases of any size. But to protect profits from customers who use plastic for everything — a recent Visa television advertisement campaign humorously suggested that only social malcontents pay with cash — some small merchants break the rule and set minimum amounts for card purchases.

Click Here to Continue Reading the Full Article at the New York Times

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Guilty Please...Citibank Scam

Guilty pleas in $2 million Citibank ATM scam
By Jacqui Cheng | Published: November 06, 2008 - 11:46AM CT
Three people who were accused of helping to steal $2 million from Citibank customers using stolen debit card numbers and PINs have pleaded guilty to access device fraud and federal conspiracy charges. The trio—Ivan Biltse, Angelina Kitaeva, and Yuriy Rakushchynets—used stolen card numbers to withdraw cash from ATMs across New York and sent the proceeds to Russia.

The story goes back to 2007, when a hacker from Russia apparently cracked Citibank's ATM server and was able to steal account and PIN numbers when people withdrew money from various cash machines. That hacker then had Rakushchynets, Biltse, and Kitaeva—along with up to seven others located in the US—burn those card numbers to the mag-stripes of fake debit cards, which were then used to withdraw cash from those accounts.

As recounted by Wired, in one way or another, many of the mules in the US managed to get caught in the months after Citibank finally reported the breach to the FBI. Rakushchynets was tied to the scheme after he was seen on ATM surveillance photos, while others were caught with blank cards and a mag-stripe writer in their car when they were pulled over for a traffic stop. Another participant was caught withdrawing money from an ATM where $180,000 had already been stolen in recent days.

In the end, Kitaeva, Biltse, Rakushchynets, and Rakushchynets' wife were charged with access device fraud, conspiracy, bank fraud, money laundering, and obstruction of justice. Olena Rakushchynets allegedly tried to destroy the contents of a safe deposit box "with the intent to impair the object's integrity and availability for use in one or more official proceedings," according to court documents. Biltse was also charged with passport fraud and illegally becoming a US resident through a fake marriage.

The team eventually pleaded guilty to various charges during the months of September and October this year, with Rakushchynets pleading guilty to the most charges (access device fraud, conspiracy, bank fraud, and money laundering). According to court documents, the parties involved will be in plea negotiations until tomorrow (November 7, 2008), at which time the updated status of the case will be determined.

Further reading:

* If you have PACER access, search for case number 1:08-cr-00384-BMC-3

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Canada's EMV Transition Numbers

Last week I posted about the decision (after a long pilot) to rollout Chip and PIN (EMV) cards and terminals across Canada. The goal is to combat fraud and the production of counterfeit cards, Interac said.

People will notice a change in the way they make a payment.  When making a purchase consumers will no longer swipe their card through a debit reader. Instead, they'll insert  the card into the terminal and leave it there during the transaction.

It will read the information on a computer chip embedded into the card. (smart card) For additional(dual authentication) security, consumers will then be required to enter their PIN.

Magnetic stripe transactions will be accepted at automatic banking machines until 2012 and at store terminals until 2015, according to Interac. Chipped cards will still have a magnetic stripe, so, if you travel to a country that doesn’t have debit chip technology, you can still use your card, Interac said.

Chip technology is based on a global standard known as EMV. EMV is named after its founders Eurocard, MasterCard and Visa.  The ongoing opinion is that US won't switch to EMV because of the costs involved, speaking of which, here's some numbers I pulled off the web painting a picture of what's involved for Canada to make the EMV switch:

Canadian debit system by the numbers:

  • 35 million: The number of debit cards that must be upgraded;
  • 603,248: The number of terminals that must be upgraded;
  • 55,562: The number of automatic banking machines that must be upgraded;
  • 1,631: Automatic banking machines per one million people in Canada;
  • 48: Percentage of Canadians who choose Interac direct payment;
  • 2012: The year after which magnetic stripe transactions will no longer be accepted at automatic banking machines and;
  • 2015: The year after which magnetic stripe transactions will no longer be accepted at store terminals. 
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