Dan Fisher

With over 35 years in the financial industry, Dan M. Fisher has proven himself as a leader in the financial industry holding roles as the former director of the Federal Reserve Bank of Minneapolis and former Chairman of the ABA Payment Committee.

Where did the money go?

A question that is often asked when it comes to the profitability of Debit Card portfolios and community financial institutions. Non-Interest Income continues to decline, and vendors point fingers, mainly at acquirers and merchants, but this is just a ruse!

Card Payment Networks have realized that they can change the rules to generate income and there is nothing you can do about it. Consequently, they have shifted the use of Network Operating Rules from Governance to a focus on revenue generation. We have seen interchange income drop 30% or more due to these rules changes. Card Payment Networks are reducing your net interchange income that ultimately reduces your Non-Interest Income (NII) to fuel their revenue income and then they point at the merchants and acquirers.

Wait a minute… these merchants and acquirers are their customers too, and the card payment networks are deliberately changing the rules to divert income away from their financial institution customers and back to the merchants/acquirers. Card Payment networks want their switch to be selected at the card purchase point. The net result of these rule changes is that the network and the merchant benefit from this changing policy and financial institutions are left with increase cost, less revenue and increased debit card fraud. In addition, the rule changes include the fact that the financial institution is unable to charge-back a fraudulent PINLess debit transaction to the merchant.

In essence, Card Payment Networks are no longer interested in the financial institution, they are focused on the opposite (the merchant), and it is costing the community financial institutions industry millions.

The shifting today of Governance and Interoperability between the member financial institutions, has been set aside and replaced with rules that benefit everybody but the financial institution (the issuer).

Regulators, and Legislators are asleep at the wheel or at least, preoccupied with the current theater in Washington. Let’s face it, community financial institution income is not prime time news today, but these practices are adversely affecting the Non-Interest Income of all exempt financial institutions.

Card Payment Networks continue to take advantage of community banks and credit unions through Network Operating Rules and the industry is helpless to defend themselves or at least does not know how to stop it.

Even the FTC has been distracted. They’re focused on what VISA and Mastercard are doing. The FTC has ignored the fact that the DOJ has approved two of the largest financial institutions processors acquisitions of the two largest Acquirer/Merchant networks. Furthermore, the acquirers and merchants have complained to the FTC that they are not getting their fair share! You have got to be kidding? Right?

Card Payment Networks serve as the gateway for most of the community banks and credit unions in the country today. These card payment networks know exactly what they are doing when it comes to manipulating the rules to the benefit of the acquirers and merchants, and The Copper River Group is the only one calling the processors out.

When ATM cards moved into the credit card space by the creation of the Branded Debit Card the world changed. Next thing you know, innovation began to take the consumer spending by storm. Out was the checkbook and in was the debit card. ATM networks began to expand and anybody that accepted Mastercard or Visa credit cards could now accept the branded Debit Card.

With the rapid expansion of Debit Card acceptances at merchants and the shrinking volume through ATM networks, processors too, need to innovate. Hence they expanded the gateways, created affiliates with other ATM switches and expanded their Network Operating Rules.

The fact is, that Network Operating Rules were originally unilateral morphed into bilateral cooperation between the switches (ATM and POS) and level set the operating rules for the members (issuer financial institutions). The key distinction is, that was then, and this is now. Card payment networks have shifted from fairness, transparency and a level playing field for issuers, to a revenue engine focus that increases the processor profits at the expense of the unknowing community financial institution.

Question: As an issuer, have you asked your processor the following questions:

1. Why has our interchange income decreased so much?
2. How do I know if I am receiving all of my income?
3. Why are my card fraud losses increasing?
4. How can we reconcile our interchange income?

If you haven’t, you should, and if you have, I bet your institution is even more perturbed now!

The Legal Labyrinth (Vendor Processing Agreements and Network Operating Rules)

When a vendor wins a core processing contract, they will ask the institution to join their card payment network. Part of joining the network is fulfilling the requirement that the institution execute an acknowledgment that the institution will abide by the rules.

This acknowledgment is buried within a processing contract that is more than a hundred pages and very difficult to read. It is presented by the sales staff as standard, perfunctory, no big deal, and just another line to sign.

What the financial institution does not know, and finds out too late, is that your institution has just given the vendor the right to do the following and there is nothing you can do about it until your contract is done and you decide to leave.

1. Change pricing at any time.
2. Change your interchange revenue.
3. Shift liability from the merchant to the financial institution with no charge-back rights.
4. Decrease your net-interchange income.
5. Add network products that you do not agree with.

Ultimately, they can change the rules anytime they want (of course with written notice) and you can’t stop them unless you leave at the end of the contract term. If you try to leave early, it will cost you hundreds of thousands of dollars.

It gets worse. Some of the Network Operating Rules include a network term that is different from your main processor contract term, with auto-renewal language that may trigger a year before your main contract expires. So, when you tell the vendor you’re leaving and going elsewhere, they drop this “Not So Fast” nugget on your institution with a hefty early termination fee, and you go ballistic.

In addition, we have noticed the emergence of linkage language that requires you to do something that you may not want to do, all because they changed the rules and you agreed to abide by them.

We are not attorneys, nor do we offer any legal advice. We always recommend that you seek to retain and engage competent legal counsel to advise you in these matters. We can also say, it doesn’t take a Doctorate in Juris Prudence to understand what the Network Operating Rules mean to you, and why you should be very careful and diligent before you decide to join a card payment network.

Do your homework and read the rules. Depending on your size, joining an issuer friendly network could save you organization six and seven figures over a five to ten-year agreement. If you gain the combination of $10,000 per month in cost savings and interchange income over a five-year processing agreement that $120,000 per year and $600,000.00 over the term of the contract. Double it to $1.2 million on a ten-year term. It adds up really fast.

To put this in context, the average monthly EFT processing invoice for a community financial institution is around $40,000.00 in fees, and if your vendor is netting your monthly invoice with your interchange income it is hard to see what is going on. Slowly, year over year, your costs go up, and your interchange goes down. The change is hard to see. If you take the time and spread your EFT costs and interchange income, over that last three years you are not going to like the trend. It’s terrible and getting worse!

No matter how you look at it, the rules are written to favor the vendor not the issuer. The rules have shifted from Governance of the network participants (primarily issuers) to Vendor Revenue generation. Furthermore, Card Payment Networks are deliberately rewriting the rules to benefit the Merchant/Acquirer not the issuer (you) by reducing their price and increasing your risk.

Processing vendors are focused on creating a network that can clear the majority of debit card payments internally using their network, controlled entirely by their rules not your interests and bypassing Card Associations (Discover, Mastercard, Visa etc…).

Choosing a card payment network, in the context of today’s vendor practices, is more important to your institution, than choosing a core processing vendor.

The Copper River Group is working hard to raise industry awareness regarding these practices. We continue to reach out with our message. At the same time, we feel that the vendors who employ these practices will not change until there is industry accountability and legislative action.

In the meantime, we have created some guidelines:

Community Financial Institutions
Network Operating Rules
Bill of Rights

Network Operating Rules should be exclusively used for Governance Only.
Card Payment Networks should be transparent and focused on the issuer.
Card Payment Networks should respect and support the debit card business operating model of exempt financial institutions.
All Card Payment Network related products and pricing should be disclosed in the processing contract (not the rules).
All new products and associated pricing should be disclosed in writing and by amendment from the Card Payment Network with the issuer option not to participate.
Any Card Payment Network rules or pricing implemented by the Card Payment Network that an issuer does not agree with gives the issuer the right to leave the Card Payment Network without penalty or triggering the early or convenience termination clause.
Any exempt financial institution should have the right to opt-out of any PINLess Debit Rule.
No Network PINLess Debit Operating Rule shall be allowed to increase the risk, loss, or limit the charge-back rights of any exempt issuer.
Issuers should be given the opportunity to opt-out of any rule change prior to implementation.
The Card Payment Network must disclose, in advance, any price change, any interchange rate change, and the corresponding impact on net interchange income to the issuer.
The Card Payment Network must include with the monthly processing invoice a full-reconciliation of interchange income at no charge to the issuer.
All Card Payment Networks should post publicly post their Network Operating Rules just like VISA and Mastercard.

Processing vendors will never change their practices until you, the community financial institution read the rules, become informed, speak-out to protect your payment system franchise, and ask your industry association leadership and legislators to investigate and intervene.

It is one thing to have unregulated Fin-Tech companies venturing into the payment system, it is another thing when your vendor “partner” takes it away from you! It is up to you to draw the line.

Warning: These vendors are using these practices to fuel their revenue engine at your expense.