Heartland and VeriFone Q&A With VeriFone CEO, Doug Bergeron

What is VeriFone doing with regard to Heartland Payment Systems and its merchants?

VeriFone will no longer support Heartland users through Heartland, effective EOD 12/31/09. However, VeriFone support desk resources will efficiently provide the same level of service and shield them from the impact of litigation.

Heartland says VeriFone support is not required.

False. In fact, in a very recent legal filing Heartland declared, “VeriFone is critical in serving existing customers and troubleshooting for problems with the POS terminals and credit card processing. Heartland provides troubleshooting and systems integration support for its merchants, which requires assistance from VeriFone. If Heartland were to be cut from any support, its customers would be forced to reach out directly to VeriFone.”

What support does VeriFone provide that customers won’t be able to get from Heartland?

After 12/31/09, Heartland will lose access to VeriFone support, including updates to platforms and software. The majority of Heartland’s customers using VeriFone systems are using the VeriFone SoftPay application for transactions. This leaves Heartland severely handicapped in providing timely resolution to issues that may arise.

Why did VeriFone take this action?

Heartland is infringing on a VeriFone patent. As a result, VeriFone is terminating its support relationship with Heartland.

VeriFone to Offer Continuous Support to Heartland Merchants

Takes Action to Ensure Pending Litigation over Heartland Infringement of VeriFone Patent Does Not Impact Merchant Service Levels

SAN JOSE, CA - November 3, 2009 – VeriFone Holdings, Inc. (NYSE: PAY) today announced that it will offer complete alternative support to merchants who are currently utilizing VeriFone payment solutions on Heartland Payment Systems’ (NYSE: HPY) network.
VeriFone is taking action to prevent any disruption to merchants after determining that the pending litigation over Heartland’s continual infringement of a VeriFone patent is likely to impact Heartland’s ability to maintain service levels with its customers. VeriFone has informed Heartland that it will terminate its support relationships with Heartland, effective end of day December 31, 2009.
“It is imperative that VeriFone merchants continue to receive support to accept card payments without any disruption. VeriFone has a fiduciary duty to protect its intellectual property, but we have a thirty year reputation of quality that demands we protect our merchants first and foremost,” said VeriFone CEO Douglas Bergeron. “Our extensive support desk resources will allow VeriFone to efficiently provide customers with a high level of service and shield them from the impact of litigation. We are making a special offer to provide this support free to all Heartland customers throughout the balance of their current Heartland processing agreement.”
VeriFone estimates that 75 percent of Heartland customers in the retail, restaurant and petroleum markets rely upon VeriFone systems. VeriFone is encouraging merchants currently supported by Heartland to immediately begin making arrangements to receive technical support from VeriFone.
Heartland merchants need to register for this free support before December 15, 2009 to ensure uninterrupted continuation of support. This offer is absolutely free and is made only to ensure that any future technical support issues can be resolved expeditiously by VeriFone.
If you are a Heartland customer with a VeriFone product, please register today.
To register online, go to http://heartland.verifone.com.
To register by phone, call 1-888-887-8199.

Industry Giants First Data And RSA Give Tokenization a Boost

Digital Transaction News

(September 22, 2009) A new data-security service announced on Tuesday by heavyweight players in payment processing and data security—First Data Corp. and EMC Corp.'s RSA unit, known as The Security Division of EMC—is expected to boost a technology called tokenization, the replacement of cardholder account numbers with surrogate numbers or “tokens.”

Since the massive data breach at processor Heartland Payment Systems Inc. in December 2007, the PCI Security Standard Council and other industry groups have felt increased urgency to find better ways to protect confidential cardholder information from the point of sale through the authorization process. Two key technologies they are looking at are tokenization and end-to-end encryption. Heartland is in the process of launching an end-to-end encryption technology called E3, but, until today, no major player had announced a data-security technology focusing on tokenization.

“It legitimizes the tokenization business,” says David Taylor, founder of the PCI Knowledge Base. He notes that First Data, which processed 1.4 trillion transactions in 2008, and RSA are “the biggest players in their respective spaces.”

Although the PCI Security Standard Council has authorized a study on tokenization, results have yet to be released, Taylor says. “This really does make it impossible for the council to ignore,” he says.

The First Data/RSA service, called First Data Secure Transaction Management, integrates both tokenization and encryption. It is designed to reduce merchants’ cost and complexity of complying with the Payment Card Industry Data Security Standard by removing confidential card data from their systems.

The service, which uses RSA’s SafeProxy architecture, encrypts payment card data using public encryption key technology at the merchant’s existing point-of-sale application. The data remain encrypted until they flow into the First Data authorization switch, where decryption occurs. Once a transaction is authorized at the switch, the card number is replaced by a token value that cannot be linked back to the original card data but otherwise behaves liked a card number.

Merchants can access the original card number through a secure vault that First Data maintains for controlled authorized look-ups for chargeback resolution or similar business activities.

By using the First Data service, merchants can eliminate card numbers from various business applications without costly application or point-of-sale hardware modifications, a First Data spokesperson says. The service will work with most PCI-compliant terminals and is hardware agnostic, she says.

First Data will provide larger merchants and merchants using value-added reseller applications with encryption software libraries and the public encryption keys for integration into their POS systems. The private key used to decrypt the card information at the authorization switch is tightly controlled within First Data and will not be available to anyone outside the company.

“Payment card data protection and PCI compliance are some of the most significant challenges that our merchant customers face today,” First Data chairman and chief executive Michael Capellas said at a press conference on Tuesday morning. “The simplicity of integrating encryption with tokenization through the First Data Secure Transaction Management service dramatically redefines how merchants of all kinds manage and protect their customer payment data.”

Development of the service is expected to be completed by year end, with merchant pilots scheduled for January 2010 and a product launch by the end of the first quarter, the First Data spokesperson says. Pricing has not yet been worked out.

But while tokenization can protect data, no one system has yet proved effective for all types of payment platforms or POS systems, Taylor says. “The hard part about it is when you have large companies offering a solution and they target the small, medium, and large business sizes and multiple platforms, you can’t really offer a consistent product right out of the box,” he says.

In addition, many merchants operate in multiple channels, including retail POS, online, and call centers, Taylor says.

“Tokenization is going to be brought around and introduced to a lot of people as a result of this,” he says. “It becomes incumbent upon the merchants to start asking some really difficult questions of some vendors in the space in terms of how their solution works in a multiplatform, multichannel environment. Those are big issues."

Banks Start To Lose Their Appetite for Juicy Overdraft Fees

Digital Transaction News

(September 23, 2009) Having lost one brawl with Congress this year over credit cards, big banks apparently are in no mood to fight about another increasingly political issue, overdraft fees. Leading debit card issuers Bank of America Corp. on Tuesday and JPMorgan Chase & Co. on Wednesday announced major changes to their overdraft-fee policies.

Press releases from neither bank linked their new, more consumer-friendly policies to bills filed or pending in Congress that would regulate overdraft and non-sufficient funds (NSF) fees. When asked by Digital Transactions News if political pressure had anything to do with Chase’s changes, a spokesperson said, “We know that people have legitimate concerns about these fees, especially around debit cards, and we want to address them.” Small transactions were the main focus in revising the policies, he added.

In BofA’s release, Brian T. Moynihan, president of consumer and small-business banking, said, “We want customers to have clarity and simplicity in everything they do with us. We started with the Clarity Commitment in home loans. Last week, we announced a simplified credit card offering that includes an easy-to-understand Basic credit card. Today, we are announcing changes to the way customers can manage their day-to-day finances that will help those who need it most right now.”

On Sept. 18, U.S. Sen. Christopher J. Dodd, D-Conn., the powerful chairman of the Senate Banking Committee, said he planned to introduce legislation that would require banks to get customers’ permission for overdraft programs. Two overdraft regulation bills already have been introduced in the House of Representatives. And the Federal Reserve in January mandated better overdraft disclosures starting Jan. 1, 2010, and is considering further regulations.

Big money is at stake. In a research report earlier this year, Boston-based Oliver Wyman cited Federal Deposit Insurance Corp. data that estimated banks’ service charges on deposit accounts had risen from $16 billion in 1994 to $39 billion in 2007. Some $29 billion of 2007’s total was NSF-related. Add credit unions’ NSF and overdraft fees and the total comes to $34 billion, Oliver Wyman said. Overdrafts have been providing a steady income for debit card issuers for some time as the popularity of the cards has exploded. An electronic-payments consultant estimated nearly four years ago that NSF fees on signature debit cards accounted then for anywhere from 30% to 50% of all the revenue issuers earn on these cards (Digital Transactions News, Dec. 1, 2005).

Under current practice, many banks offer overdraft protection automatically on demand-deposit accounts and let customers take their balances below zero without warning, with the bank covering the check or debit card transaction. This, of course, generates fees, especially with the huge growth in consumers’ use of debit cards for purchases in recent years. Plus, the fees themselves have risen, with many banks now charging over $30 per transaction. Dodd also noted that some banks process their check and debit card transactions in such a way that the biggest transactions clear first on a given day, making overdrafts more likely on smaller transactions. A $5 debit card purchase on an overdrawn account thus can easily cost the cardholder $35 to $40.

The two banks’ releases indicate that they’re trying to address the criticisms. Under revisions to take effect in 2010’s first quarter, Chase will: eliminate overdrafts for debit cards unless the customer opts into such services; modify posting to recognize debit card transactions and ATM withdrawals as they occur; eliminate overdraft fees if a customer’s account is overdrawn by $5 or less; and reduce the maximum number of overdraft fees per day to three from six.

BofA is making its changes in two phases. Beginning Oct. 19, the bank will not charge overdraft fees when a customer’s account is overdrawn by less than $10 for one day; not charge overdraft fees on more than four items per day; improve the process for customers to opt out of overdraft service; and issue improved disclosures. Effective next June, BofA says it will introduce an annual limit on the number of times customers can overdraw their accounts at the point of sale when they do not have sufficient funds; contact customers who are nearing the annual limit “to provide education and tools to help them better manage their finances,” and limit overdraft capability—and fees—for customers who reach the annual limit; and provide new customers the choice to opt into the overdraft service when they open accounts.

A 2008 FDIC study of bank overdraft programs found that 74% of DDA accounts incur no NSF/overdraft fees, but that 5% of accounts incurred 20 or more NSF transactions annually and accounted for 68% of fee revenue, according to Oliver Wyman. “Our immediate priority is those customers who excessively overdraw their accounts,” Susan Faulkner, customer segments and deposits executive, said in BofA’s release.

Robert Meara, a banking analyst with an Oliver Wyman subsidiary, Boston-based Celent LLC, tells Digital Transactions News that NSF/overdraft fees are “increasingly viewed as untenable,” both politically and in the marketplace. He notes that besides the pressure from Washington, competitors such as USAA and ING Direct are offering free overdraft protection on some accounts, and others are bundling accounts to raise balances, thereby reducing the chance of incurring an overdraft fee. “These changes [by BofA and Chase] represent a step in the right direction,” he says. “I would expect more banks to follow suit.”

That said, NSF and overdraft fee revenues are now so large that banks will “need to be creative” in finding replacements, he adds.

Merchants Urge That U.S. Follow Overseas Example on Interchange

Digital Transactions

(September 17, 2009) Merchants turned up the heat on banks and the bank card networks on Thursday by releasing a report showing that interchange fees in the U.S are much higher than in other countries, and arguing that policymakers in the U.S. should regulate interchange as have their counterparts overseas. “We want to make sure the public and polcymakers understand what is going on around the rest of the world,” said Mallory Duncan, senior vice president of the National Retail Federation, a Washington, D.C.-based trade group that has led the charge against interchange, or “swipe fees,” as merchant groups have started calling the fees merchant acquirers pay issuers on each card transaction.

Duncan spoke during a press conference held by the Merchants Payments Coalition to release its 14-page report, entitled, “’Swipe Fee’ Reform--International Lessons.” The MPC, also based in Washington, was formed by retail trade groups in 2005 to lobby in favor of interchange regulation. In the report, the MPC shows the U.S. with the highest interchange among 15 countries or regions compared, at 2%. New Zealand, Australia, and the European Union, all of which have acted to regulate interchange in one way or another, are shown at 0.95%, 0.50%, and 0.30%, respectively.

Arguing that interchange fees are ultimately borne by consumers and thus drain the economy, the MPC says that consumers in the U.S. would have saved $125 billion over the past four years had the same regulation been imposed here as was imposed in Australia. In 2003, the Reserve Bank of Australia capped interchange at an average of 0.55%, about half what it had been. “The result is consumers [in Australia] have saved money in the billions of dollars, there’s more competition, consumers pay lower fees for credit cards, and the economy has benefited, all while credit card transactions have gone up,” said Douglas Kantor, counsel to the MPC, during the press conference.

The argument that current interchange rates harm the economy comes at a time when legislators may be especially willing to listen, with the economy still struggling to recover from its deepest recession since the 1970s. Already, three pieces of legislation have been introduced, two in the House of Representatives and one in the Senate, that would rein in interchange either through beefing up merchants’ bargaining power with the banks and the card networks or by allowing merchants to surcharge for them.

But a spokesperson for the Electronic Payments Coalition, a D.C.-based group formed by banks and the card networks to lobby against interchange regulation, charges that the MPC’s report is misleading. “The premise of the study is fundamentally flawed,” she tells Digital Transactions News.

The rates shown in the report for various countries and regions represent interchange only, she says, not the total rate, or discount rate, that merchants pay on each transaction. In the U.S., interchange accounts for 80% to 85% of the discount rate, which also includes fees to acquirers and processors, but a much lower percentage overseas, where acquirers assume more risk responsibility, she says, and hence collect a higher proportion of the overall rate. Looking at discount rates rather than interchange alone, the U.S. is in the middle of the pack rather than at the top, she argues. “In reality, what merchants pay in Europe is about the same as in the U.S.,” she says.

Indeed, the 0.30% rate shown for the EU is an interim rate imposed by the European Commission on MasterCard Inc. only, and only for cross-border transactions, which account for between 3% and 5% of all MasterCard transactions in the region, the EPC spokesperson estimates.

As for Australia, while the interchange cap did slash rates dramatically, it’s debatable whether consumers benefited and if so, by how much. The MPC report cites a 2005 study from the Payment Systems Board, part of the RBA, that indicates merchants were passing interchange savings on to customers. But a 2004 report from the Australian Competition Tribunal found no evidence that merchant savings were flowing to consumers. Some 83% of U.S. consumers believe merchants would pocket any savings from reduced interchange rather than pass them on, according to a Visa Inc. survey released on Thursday. Visa canvassed 1,000 consumers in July.

After the RBA imposed the cap, banks in Australia hiked annual fees and cut back on rewards to help recoup lost interchange income. “This is what merchants want to do in the U.S.” says the EPC spokesperson. “They want consumers to pay.”

Citing Debt Load, Cynergy Data Declares Bankruptcy And Seeks Sale

Digital Transactions News

(September 1, 2009) Citing the weak economy and “an unsustainable debt load,” the big independent sales organization Cynergy Data filed for Chapter 11 protection Tuesday in U.S. Bankruptcy Court in Delaware. The Long Island City, N.Y.-based processor also said it planned to sell its assets to The ComVest Group, a private-equity firm with holdings in several other merchant processors.

In a press release, Cynergy Data chief executive Marcelo Paladini said the Chapter 11 process would allow the company to continue providing its merchant credit card processing services while completing a structured asset sale. And in a separate letter to “our friends and colleagues in the payment processing industry,” Paladini said, “As you may know, like so many companies in the electronic payment industry, Cynergy Data has faced its share of challenging circumstances recently. From the difficult economic conditions to an unsustainable debt load, our employees, management team, and industry partners have striven to overcome these challenges and continue delivering world-class payment-processing services.”

The announcements did not go into detail about Cynergy Data’s financial problems, and spokespersons were unavailable for comment late Tuesday. Three corporate entities filed for Chapter 11: Cynergy Data Holdings Inc., of which Paladini owns 92%, and its wholly-owned affiliates, Cynergy Data LLC, the main operating company, and Cynergy Prosperity Plus LLC. Cynergy Data LLC listed assets of $109.5 million and total debts of $186.2 million.

The bankruptcy petitions list Cynergy Data’s 25 largest unsecured creditors. The top five and the amount they are owed are: Process America, $2.81 million; Chase Paymentech Solutions, $2.63 million; TSYS (Total System Services Inc.), $1.46 million; MyGrantSite.Net, $1.38 million; and Second Source, $1.06 million.

Founded in 1995, Cynergy Data has a portfolio of nearly 80,000 merchants that generate more than $10 billion in annualized charge volume. The company’s Web site lists its sponsoring banks as Wells Fargo & Co. and Harris N.A.

The bankruptcy court would supervise the proposed “stalking horse” auction of Cynergy Data’s assets under Section 363 of the U.S. Bankruptcy Code. In such a sale, a prearranged buyer, in this case ComVest, comes in with a bid that establishes a floor price for the debtor’s assets. But other interested parties could win if they submit better bids. Cynergy Data hopes to complete the sale in 90 days. The processor says it has sufficient cash to continue operating during the sale process, and it also has a commitment letter for debtor-in-possession financing.

West Palm Beach, Fla.-based ComVest has controlling interests in such payments firms as Pipeline Data Inc., Cardaccept Inc., AirCharge.com, SecurePay.com, and Northern Merchant Services Inc. In a statement, ComVest managing partner Pete Kight said, “We believe that Cynergy has a significant competitive advantage in its processing business, offering superior service and technology to its many merchants and ISO partners. As a firm that has a great deal of experience in payments processing, we are committed to Cynergy’s success in the future and look forward to partnering with Cynergy’s management team in serving the industry for many years to come.” Kight founded CheckFree Corp., the big bill-payment and payments software firm now owned by Fiserv Inc.

Cynergy Data has appointed a chief restructuring officer, Charles M. Moore. A hearing is expected Wednesday at the bankruptcy court in Wilmington, Del.

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