Georgia Breaks Legal Ground With New Charter for Specialty Acquiring Banks

A little-noticed new Georgia law creates a new type of bank dedicated solely to merchant acquiring that could radically transform how the acquiring business works in the U.S.

Enacted at the behest of Global Payments Inc., the big Atlanta-based merchant processor, the law enables a non-bank acquirer to own its own sponsor bank. Such a bank would cut out one of the oldest links in the payments chain, the unaffiliated sponsor bank that funnels transactions into the Visa and MasterCard networks on behalf of independent sales organizations and other merchant processors.

No other state has a similar law, according to merchant-acquiring experts. “This law will definitely change the face of merchant acquiring,” Adil Moussa, a senior analyst at Boston-based Aite Group LLC who researches the acquiring industry, tells Digital Transactions News by e-mail. “It is something that many ISOs have been trying to get.”

Global Payments did not respond to requests for comment, and spokespersons for Visa and MasterCard declined to comment about the new Georgia law.

The advantages to non-bank processors of chartering a captive specialty bank instead of a using traditional sponsor may include lower costs from operating a financial subsidiary directly instead of paying an outside bank to supply its bank identification number (BIN) to submit transactions to Visa Inc. and MasterCard Inc. Both networks in the U.S. require transactions to come from bona fide financial institutions. “This could create an acquirer with costs that are below the regular baseline costs,” says Adam Atlas, head attorney at Montreal-based Adam Atlas Attorney at Law, which does most of its business with U.S.-based ISOs. “There’s a potential for a tremendously competitive acquirer to emerge.” A captive bank also would give a processor more control over the full spectrum of acquiring functions.

Meanwhile, some industry observers report decreasing interest from traditional banks in assuming the sponsorship function. In Europe, the networks recently changed long-standing rules to permit ISOs to submit transactions directly instead of going through member banks.

The networks ostensibly would not be obliged to accept transactions from Georgia acquiring banks, according to Atlas. “Visa and MasterCard are private concerns and they can do business with whomever they like,” he says. Still, he expects they will, especially if the banks meet the networks’ criteria for sponsorship, including capital requirements, and display sufficient competence in controlling risk. “I think the entities that fit that description in Georgia would have a strong argument under antitrust law to require Visa and MasterCard to accept them as members,” he says.

Global Payments presented the idea of the state creating a charter for a specialty acquiring bank to its lobbyist, Pete Robinson, a partner in the Atlanta law firm of Troutman Sanders LLP. Robinson would not talk about Global’s plans going forward, but says the company wanted its own bank, but one that would not do business with the public and offer checking accounts, loans or other mainstream products. “We kind of walked through the ideas,” says Robinson. “The traditional full-service bank idea wasn’t what they really needed. They’re in the transaction business.”

Robinson got input from other payments entities, including Columbus, Ga.-based processor Total System Services Inc. (TSYS), and helped craft legislation that eventually passed by wide margins in both houses of the state legislature and was signed into law March 28 by Gov. Nathan Deal. Under the law (HB 898), an acquiring bank must be owned by an “eligible organization” that at all times has a Georgia office and employs at least 250 state residents directly or indirectly involved in providing merchant-acquiring or settlement services. Such banks may accept deposits only from their parent companies and maintain minimum capital of $3 million. The law gives chartering and regulatory authority over acquiring banks to the Georgia Department of Banking and Finance.

Georgia already is the home of some huge merchant processors that besides Global Payments and TSYS include First Data Corp., WorldPay US Inc., and Elavon, the acquiring subsidiary of Minneapolis-based U.S. Bancorp, as well as many smaller payments companies.

Aite’s Moussa says the law could have far-reaching effects if it indeed lowers processors’ costs enough to give them a competitive price advantage with merchants. “This law can also become a precedent to be implemented in other states, or at least force some of the large ISOs to consider a change in their headquarters to Georgia in order to benefit from this law,” he says.