Common in Acquiring, Sharing of Bad-Merchant Data Comes to the ACH

Taking a cue from bank card merchant acquirers, bank processor Fidelity National Information Services Inc. (FIS) and NACHA on Monday announced the formation of the Terminated Originator Database, a new service to help banks identify businesses that other banks have cut off from originating automated clearing house transactions because of high risk.

NACHA selected Jacksonville, Fla.-based FIS as its preferred vendor to operate the service, which FIS switched on March 1 but didn't announce until NACHA's Payments 2011 conference this week in Austin, Texas.  A recent NACHA board policy statement encourages but does not require banks to use the TOD service, which depends on financial institutions reporting high-risk businesses to it. In that respect, TOD bears some similarities to the three major credit-reporting agencies, Experian, Equifax, and Trans Union, all of which depend on banks and credit unions to regularly submit reports about their customers' loan-repayment behavior.

"The value of this is the collaboration," Dennis Maicon, vice president of product management in FIS's Risk, Fraud, and Compliance Solutions unit, tells Digital Transactions News. "It's the information sharing that's the first of its kind."

The first of its kind for the ACH, that is. Rather than consumer credit-reporting agencies, TOD is most similar to a system bank card merchant acquirers have used for years, a system known as MATCH, for Member Alert to Control High Risk. NACHA president and chief executive Janet O. Estep, a former acquiring executive with U.S. Bancorp, notes that MATCH takes in reports from acquirers about merchants the processors banned from card acceptance because of high chargebacks, and identifies those merchants to other processors so that the risky businesses can't get merchant accounts again.

Herndon, Va.-based NACHA's risk-control staff several years ago launched the so-called Originator Watch List, or OWL service, a database of suspect originators, but TOD is more comprehensive. "This is one tool for a financial institution's due diligence," Estep said at a Payments 2011 news conference. "It is new to the ACH network."

FIS has a Web site for financial institutions to report terminated ACH originators. The site includes reason codes for the termination. Pricing includes a signup fee and then per-transaction or subscription fees, or a combination of both. Pricing also depends on the size of the institution by assets. FIS didn't disclose details. To get the system up and running, FIS is offering "financial incentives" to early adopters, Maicon says.

New Financial Regulations

One way of searching for investment opportunities is to look for businesses that are thriving with products and services that are in demand. But another method for finding investment opportunity is counterintuitive: Look for something that is broken or doesn't make sense. Once you locate that problem or fault, either look for a company that may have a solution or perhaps look at the problem itself to see if it is viable or just noise.

Financial regulation, or FINREG, is one of those "problems" that contains some noise. FINREG creates challenges for banks, brokerages, lenders and the consumer.

If you are not completely familiar with the complex 2,300-page bill, The Wall Street Journal assembled this interactive page that details the different facets.
How Can You Profit From the Confusion?

Sometimes an apparent roadblock (legislation in this case) may have holes that make it less restraining than first thought. Now, I'm not going to say that FINREG isn't a highly restrictive, far-reaching, costly (in several respects) and poorly timed bill.

But some parts are just plain ridiculous and bad for the American consumer, and should be altered or removed. One of those pieces is the "Durbin Rule."

Back on March 10, in a note to my subscribers of WaveStrength Options Weekly I detailed this flawed piece of the FINREG puzzle:

Some of you may have heard of the "Durbin Rule" -- it's imbedded in the Dodd-Frank financial regulation bill.

The rule essentially states that "interchange fees," those fees that retails incur anytime you swipe a credit or debit card, are to be limited (fixed) to 12 cents per transaction (the average is 44 cents). It means retailers will be capped in the amount they have to pay in merchant fees that are charged by banks and by Visa, MasterCard, etc. Good news for retailers and bad for banks and our friends over at Visa and MasterCard. This rule equates to BILLIONS of dollars annually!

Our genius politicians thought this legislation would benefit the consumer because the retailers would lower prices because of their savings. This may be true in some cases, but there are serious flaws.

If this is implemented in its current form, big banks like Bank of America and JPMorgan Chase will lose billions of dollars in revenue, as will Visa and MC. What's worse is that the bill excludes smaller banks (which was meant to help them), but if small banks continue to charge high fees and the large banks are forced to do it cheaper, the small banks will lose business.

All the banks are waging war on Capitol Hill to get this rule overturned or, more realistically, modified, which I believe will happen.

Our angle is that the markets have NOT priced in a good outcome for MasterCard, but I believe a compromise will come about, because the rule as it stands now just doesn't work -- this will be beneficial for MA.

Since then, MasterCard (MA:NYSE) stock went from $241 to a high of $262. WOW subscribers were able to capture some fantastic profits there and have since exited, but I wanted to take this a bit further and share this story with you.

On Tuesday the Federal Reserve declared that it is going to delay its ruling on appropriate levels from April 21 till July 21, which was a big win for MA and Visa (V:NYSE), not to mention my hypothesis from two weeks prior.
What "Durbin" Means for You

FINREG is supposed to "help" the American consumer, but aside from the issues for the banks, there are many ways in which this hurts us. Banks have shareholders to report to, which means they must keep profits up. If you take a couple billion dollars away from their balance sheets, they must replace it.

Guess who gets to replenish their balance sheets? The American Consumer!

Some of these changes are ALREADY happening, here are some of the ways the Durbin rule and FINREG is "helping" (hurting) you:

While ExxonMobil would make a great partner for the NOC's

ExxonMobil Corp (XOM): Resource nationalism has always been a challenge for international oil companies (IOC's) and their ability to grow production, but now that the majority of the world's remaining resources are government controlled, that challenge is quickly increasing. Large oil providers like ExxonMobil need sizable projects in order to operate at the level they are accustomed, but with oil-rich nations continuing to favor national oil companies (NOC's) over international ones, fewer projects exist. While ExxonMobil would make a great partner for the NOC's, partnerships are less profitable and harder to secure, to the point, some would argue, of being uneconomical. Due to their long development times, investing exclusively in "megaprojects"is risky; therefore, management must make the decision to take on more projects at less favorable terms or pursue frontier locations. Short interest is at 0.56%.

Avon Products Inc. (AVP): Following several years of rapid international expansion, Avon is now working tirelessly to rid itself of all the inefficiencies created by that very same expansion, including a bloated management structure and poor supply chain. Incurring $700 million in restructuring costs in 2010 alone, CEO Andrea Jung must fix these follies fast, as tight consumer spending and execution issues in developing markets continue to stall sales growth as is. Given that about 80% of Avon's consolidated sales are international, the company faces significant exposure to currency fluctuations. Also, key markets in Japan will be hit especially hard due to the crisis following the March 11 earthquake and subsequent tsunami. Some investors now wonder if the full benefits of Avon's restructuring will take longer than initially forecast. Short interest is 2.00%.

American Express Co (AXP): In stark contrast to their lend-centric competitors like Visa and MasterCard, Amex has always been spend-centric, relying on merchant fees--instead of loan rates--to account for most of their earnings. In order to increase those earnings, they encourage the use of their cards. But while it may sound okay to entice cardholder spending, Amex was doing so pre-2008, at a time when the housing market was booming and cards were in the hands of high-spending clients who were spending beyond their means. Then came the 2008 financial crisis, which rocked Amex so hard it shook the putty from every little crack in their business model. Three years later, the card lender is still patching holes. In an effort to speed up repairs, Amex has recently opened their "closed-loop"model by partnering with banks and third party lenders in an attempt to build their client base, but concerned investors wonder if it is smart for Amex to look for growth outside its core clientele of high-net-worth individuals. Other risks concerning investors: Amex will continue to struggle as long as the unemployment rate remains high; the company still faces regulation. Short interest: 0.78%.

Gold & Silver Higher as Eurozone Downgrades

Gold and, particularly, silver are higher in European trading, especially in Japanese yen, which has come under pressure again today. The initial "repatriation funds" yen rally in the days after the natural and nuclear disaster has abated.

Gold is again close to record nominal highs in yen (119,000/oz) and other currencies. The outlook for the yen is not good due to massive fiscal and demographic challenges, zero percent interest rates and ongoing currency debasement – none of which will be helped by the nuclear disaster.

Risk appetite remains high with investors buying equities and shrugging off considerable geopolitical and sovereign debt risk. The downgrades of Portugal and Greece have led to new record high 10-year bond yields for both – at over 8.02% and 12.73% respectively.

Gold is supported at $1,410/oz and at $1,380/oz and €995/oz. A close above the record nominal high of $1,447.82/oz would likely see gold rise to psychological resistance of $1,500/oz in short order.


Gold in US Dollars - 17 February 2010 - 30 March 2011 (Tick)

Gold commenced 2011 at $1,420.78/oz and with two days of trading left in the first quarter, gold is marginally higher at $1,420/oz. It is therefore flat for the quarter after another quarter of correction and consolidation.

A lower quarterly close would be the first lower quarterly close in nine quarters. This may be beneficial to some of those short the gold market who may be attempting to "paint the tape" and engineer a lower quarterly close – in the forlorn hope that this could lead to momentum selling by trend, following hedge funds and traders.

A lower quarterly close may be achieved but the fundamentals of anemic supply and continuing strong demand both from the investment sector, but also from the jewelry and industrial sectors (dental and electronics primarily) internationally, and particularly in China and Asia in general will likely see gold continue to rise in 2011.

Gold in US Dollar - 1 January 2010 - 30 March 2011 (Daily)

Interestingly, March 2010 and the first quarter last year (see chart above), also saw gold flatline prior to strong gains in April and the second quarter of 2010 (Q2 10). Gold rose by nearly 6% last April and by nearly 12% in the quarter.

The unresolved eurozone debt crisis and the emergence of the Japanese natural and nuclear disasters and geopolitical risk in oil producing nations means that the fundamentals today are as sound as they were in 2010 – if not more sound.

Bearish predictions that higher gold prices would lead to sharp falls in industrial and jewelry demand are being proven wrong as seen in the figures released by the CPM group this morning (see news).

NASA Inspector General Concludes Agency Computers Vulnerable to Cyber-Attacks

There are few large-scale computer systems today that don't – at some point – experience attacks or attempted attacks from hackers. Chances are, if you have a credit card or ATM card, at some point, a merchant has informed you of a breach in their system (and stored personal data) that required you to change your credit card and perhaps take advantage of free credit monitoring service paid for by the merchant.

But let's face it, not all computer networks are created equal. While a breach in T.J. Maxx's network might be inconvenient for many, it's unlikely to get anyone killed. So you'd think critical government agencies, for example, would take better care.

Apparently not.

NASA's inspector general concluded this week that computer servers used by the space agency to control spacecraft were vulnerable to cyber-attack through the Internet, reported AFP.

Sweet, huh?

"We found that computer servers on NASA's agency-wide mission network had high-risk vulnerabilities that were exploitable from the Internet," NASA inspector general Paul Martin said in a report that concluded an audit of NASA's network security. "Specifically, six computer servers associated with IT assets that control spacecraft and contain critical data had vulnerabilities that would allow a remote attacker to take control of or render them unavailable," said the report.

Apparently, a malicious hacker who managed to penetrate the network could use compromised computers to exploit other weaknesses and "severely degrade or cripple NASA's operations."

The inspector general's audit of NASA's computer security reportedly found system-wide holes such as network servers that revealed encryption keys (oops!) encrypted passwords, and user account information.

"These data are sensitive and provide attackers additional ways to gain unauthorized access to NASA networks," the report said.

The inspector general warned that "until NASA addresses these critical deficiencies and improves its IT security practices, the agency is vulnerable to computer incidents that could have a severe to catastrophic effect on agency assets, operations, and personnel."

You'd think they'd be onto this already. In 2009, hackers infected a computer system that supports one of NASA's mission networks. "Due to the inadequate security configurations on the system, the infection caused the computer system to make over 3,000 unauthorized connections to domestic and international Internet Protocol (IP) addresses including addresses in China, the Netherlands, Saudi Arabia, and Estonia," recalled the report.

Also in 2009, hackers stole 22 gigabytes of export-restricted data from a computer system at the Jet Propulsion Laboratory (JPL), a federally funded NASA research and development center in Pasadena, California.

The inspector general recommended that NASA immediately act to mitigate risks on Internet-accessible computers on its mission networks and carry out an agency-wide IT security risk assessment.

Credit Card Pioneer on Lowering Processing Expense

Credit card processing can be one of the most confusing parts of ecommerce for many merchants. The rates fluctuate widely and the monthly statements are hard to follow. And yet, credit card processing is key to virtually every ecommerce business. To help us understand how merchants can save money on their processing costs, we spoke to credit-card processing pioneer Sloane Bouchever. He's the co-founder of e-onlinedata, the large merchant account provider, and prior to that he was senior vice president of Authorize.Net, the payment gateway. His new firm is Interchange Plus Solutions. We talked with him about credit card payments and how merchants can reduce their processing costs.

Practical eCommerce: What is your view of the credit card processing business, especially from an ecommerce merchant's perspective?

Sloane Bouchever: "Overall, I think the industry has been a great ally of ecommerce merchants. When I started focusing on ecommerce in the 1990s, very few processors would approve Internet accounts because they perceived the risk was too high. Merchant account providers and gateways like Authorize.Net have embraced ecommerce. I think it's helped web merchants to build their businesses for the past 15 years."

PEC: What are some of the most common fee abuses that account providers are imposing on ecommerce merchants?

Bouchever: "There are a number of abuses that particularly stand out and most of them are inherent to the three-tier [i.e. "qualified," "mid-qualified," "non-qualified"] billing system that most small ecommerce merchants are set up on. Number one is downgrading rewards and corporate cards to nonqualified rates. The actual interchange cost for an ecommerce rewards card is just about 2.06 percent, but many merchant account providers are downgrading rewards cards and actually charging over 4 percent.

"Number two, the cost of processing a debit card is much, much lower than processing a credit card because the risk is much lower. But processors are charging debit cards on the Internet at about 2.25 percent where the rates are really much lower. They're not passing through the lower risk on debit card transactions.

"Number three, a lot of processors are taking unfair advantage of the yearly increases in Visa and MasterCard rates and fees. Every April and October, Visa and MasterCard typically adjust their interchange rates. So, suppose Visa raises the interchange fees for, say, corporate cards by three basis points, which is 0.03 percent; many providers will take advantage of this and increase across the board all card types by 5 or 6 basis points. In my opinion, this adding of interchange is a serious violation of trust.

"And don't get me started on termination fees that providers are charging to small merchants. They are really unjust and unfair. If you want to change your processor, you should be allowed to do that."

Ship Rejected in China Port on ‘Abnormal’ Radiation Heading Back to Japan

A ship that had “abnormal” amounts of radiation after passing 67 nautical miles (124 kilometers) off Japan’s Fukushima prefecture, site of a crippled nuclear-power station, was heading back to the country after being rejected by authorities in China.

The MOL Presence is due to arrive in Kobe on March 30 from Xiamen, according to AISLive Ltd. ship-tracking data on Bloomberg. A Xiamen port official, who declined to give their name in a telephone call today, confirmed that the vessel had left and declined to elaborate.

An inspection detected “abnormal” amounts of radiation on the deck and the surface of containers on the Mitsui O.S.K. Lines Ltd. vessel after it arrived in Xiamen on March 21, according to a March 25 notice on the website of the Xiamen Entry-Exit Inspection and Quarantine Bureau. There were normal levels in crew areas, it said.

Kazumi Nakamura, a spokeswoman for Tokyo-based Mitsui O.S.K., said today she couldn’t comment as she was traveling. Calls to the City of Kobe’s port general affairs office and to the Port of Kobe’s general affairs office went unanswered.
Radiation Concerns

Concerns about radiation leaking from the Dai-Ichi power station have disrupted shipping from Japan with Hamburg-based Hapag-Lloyd AG halting Tokyo calls, the Japan Coast Guard advising ships to keep at least 30 kilometers from the plant and overseas ports scanning cargos. Tokyo port has tried to ease fears through steps including posting information about radiation levels online.

“Radiation is not at a level where we should be concerned,” Junko Tashiro, a port spokeswoman, said today by phone. The nuclear-power plant, damaged following a magnitude-9 earthquake on March 11, is about 220 kilometers north of Tokyo.

Companies including Sony Corp. and Toyota Motor Corp. have curtailed production since the quake and a subsequent tsunami because of damaged factories or parts shortages. The nuclear- power plant crisis has also caused electricity shortages.

U.S. Customs and Border Protection scanned 355 boxes at the Port of Los Angeles onboard the first container ship to arrive in the country from Japan following the quake, according to operator APL Ltd., a unit of Neptune Orient Lines Ltd. All boxes on the vessel, the APL Korea, were cleared for delivery.
Container Volumes

Japan accounts for about 3 percent of global container volumes, compared with about 30 percent for China, according to Barclays Plc. It is the third-largest container shipper to the U.S. behind China and South Korea, with auto parts being the largest component of cargos, according to Piers, a shipping data unit of United Business Media Ltd.

The MOL Presence used a berth in Xiamen before leaving and anchoring offshore on March 23, according to the port bureau. There was contamination at the berth, the bureau said. China is Japan biggest export and import market, according to the Japan External Trade Organization.

Hapag-Lloyd has omitted port stops in Nagoya, Tokyo and Yokohama because of “the current situation,” it said in a statement on its website dated March 22. A March 25 update showed that it was continuing to avoid these ports. A Hapag- Lloyd spokesman couldn’t immediately be reached to comment.

Other lines are continuing business in Japan as usual. Seoul-base Hyundai Merchant Marine Co. is operating its usual services, Lee Jun Ki, a spokesman, said by phone today. STX Pan Ocean Co., South Korea’s biggest bulk carrier, is also operating its vessels normally at Japanese ports, said Lim Wang Joo, a spokesman.

APL is continuing its regular calls to Kobe and Yokohama, Mike Zampa, a spokesman said today by phone. The shipping line has directed vessels to stay 200 nautical kilometers from the Fukushima area, he said.

The company has also stopped taking bookings for cargos to be hauled by land or barge into “high risk merchant account” areas near the nuclear plant, he said.

--Henry Sanderson. With assistance from Seonjin Cha in Seoul, Anand Menon and Patricia Lui in Singapore, Chris Cooper in Tokyo, Makiko Kitamura and Takehiko Kumakura in Osaka and Alaric Nightingale in London, as well as Holger Elfes in Dusseldorf. Editors: Neil Denslow, Hellmuth Tromm.