Visa, First Data 'Net' a Settlement
First Data Corp.'s plans to establish a large network that directly connects merchants and card issuers is being dismantled. The Denver-based transaction processor recently settled a 4-year-old legal dispute with Visa USA over the First Data Net processing network.
The closed-loop system processes so called "on us" transactions, where First Data serves as the processor for both the card issuer and the merchant acquirer for the same transaction.
In a joint statement released by the companies, Visa pledged to "provide financial support to pursue mutual business opportunities and cost-cutting initiatives." First Data pledged it would "transition" its customers that are Visa-member financial institutions onto VisaNet, the Visa transaction switch First Data Net was designed to bypass to reduce processing costs.
Alex W. (Pete) Hart, president of Hart & Associates, a Rancho Santa Fe, Calif.-based consultancy, believes the settlement made sense for both companies. "The settlement probably is a good thing for the industry," says Hart, a former president of MasterCard International. "I don't think anyone won anything there, but it eliminated a distraction for both companies, which said, 'Let's move on with our business.'"
Hart says the payments game continues to change with consolidation occurring on both the issuing and the acquiring sides of the business. "Visa and First Data are trying to sort their way through that, and the lawsuit was a distraction," he says.
Visa estimated in 2002 that as many as 15% of its transactions could be eligible for the First Data Net system.
The legal tangle began in April 2002 with Visa filing suit against First Data, charging that First Data Net allowed certain Visa transactions to bypass the Visa network. Those transactions were at a greater risk for fraud, according to Visa.
First Data responded in November 2002 with a suit of its own, charging Visa with anticompetitive practices and trade libel.
Their joint statement last month noted that "new leadership at both companies recognized a mutual interest" in settling the suits. Henry C. "Ric" Duques returned to become CEO of First Data last November, and John Coghlan was named Visa USA president and CEO in July 2005.
The settlement may represent the end of a concept that never quite took off. First Data Net was designed to attract large banks with strong issuing and acquiring programs.
Court documents filed in 2002 revealed that Bank One Corp., then the nation's largest Visa card issuer, had signed on to participate. Visa sued to stop First Data Net when it was processing about 300,000 transactions per day, claiming the activity violated its rules. First Data countersued charging anti-competitive practices.
At the time, First Data Net did not include MasterCard transactions, and MasterCard never joined the suit.
Times have changed since 2002, including the purchase of Bank One by JPMorgan Chase & Co. in 2004. Chase moved the issuing side of its card-processing business to Total System Services Inc., or TSYS, last July with plans to perform more of the work itself.
"The settlement would have been more significant when First Data had a greater share of the card-issuing market. But they've lost market share," says Robert Todd, an analyst with investment firm Morgan Keegan. In addition, First Data has shifted the focus of its card processing to private-label cards, a group generally not interested in on-us transactions, says Dodd.
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