Visa Inc.’s disdain for the automated clearing house as a competing payments network has been a given for years, but never did it come into focus more than it did last week when the giant card network announced its wide-ranging agreement with PayPal Holdings Inc.
The deal smoothed over a long-running feud between the two payments companies that had been sparked by PayPal’s policy of favoring ACH over cards for its customers’ account funding. Now, under the multiyear agreement, PayPal will stop favoring ACH and will promote Visa cards instead for the first year.
But the attitude of Visa’s top management toward the ACH, built by many of the same banks that issue Visa cards and run transactions on the Visa network, remains fraught. During an earnings call Thursday with analysts to discuss Visa’s quarterly results as well as the PayPal pact, Visa chief executive Charles W. Scharf held back little of the bitterness top officials at the card network harbor for the 42-year-old ACH system.
“What we’ve heard consistently from issuers, and I certainly experienced it when I was at one, is that the ACH is a really bad thing,” Scharf told the analysts. “You’re disintermediated, it’s a bad customer experience, they don’t understand the process to dispute things. Call centers don’t understand information and things like that. And so given a choice you would rather have a transaction run over a Visa debit or credit product rather than ACH. I would assume that most issuers would choose to want to actively engage to try and move those transactions onto cards, which quite frankly consumers know, love, understand and are very comfortable with how those products work.”
In response to an inquiry from Digital Transactions News, NACHA, the Herndon, Va.-based rules-setting organization for the ACH, responds to Scharf’s comments by noting that most ACH transactions “work flawlessly.” “In fact, ACH debits have a return rate that is lower than cards, and WEB debits, which companies like PayPal use, have a return rate lower than recurring payments and the network as a whole,” says Janet O. Estep, president and chief executive at NACHA. WEB debits are a classification of ACH transactions used by online companies to collect payment from customers.
There is some truth in what Scharf said, but “it’s a rather self-serving quote” coming from the man who runs Visa, says Nancy Atkinson, a senior analyst at Boston-based consultancy Aite Group and a recognized expert on the ACH.
“It’s laughable to characterize the ACH as ‘a really bad thing’ since it’s only potentially ‘bad’ for Visa as well as the big banks and their loss of the exorbitant fees they collect from credit and debit cards,” says Mark Horwedel, chief executive of the Minneapolis-based Merchant Advisory Group, a trade group for major retail chains and a critic of the card networks.
Atkinson agrees consumers feel protected by credit card agreements and think they understand cards more than the ACH, which started out as a back-office system among banks to clear business-to-business transactions and only within the last 15 years or so added consumer payments. But banks are reasonably quick to satisfy consumers who dispute ACH transactions, Atkinson says. “Most institutions will credit back ACH [transactions] while they do research,” she says.
Horwedel argues card-issuing banks have their own problems with customer service. “Merchant call-center activity surrounding payments usually involves sorting out card-payment complaints from consumers, primarily when issuers fail to credit customers on a timely basis for returned goods at the point of sale,” he says. “There are plenty of customer issues with card payments, especially given their vulnerability to fraud along with the recent botched EMV conversion and liability shift.”
Banks are likely to favor cards, Atkinson says, not because of inherent flaws in the ACH network but because they earn far more income from card transactions. On the other hand, merchants take a hit on card payments compared to ACH, which is the reason PayPal promoted ACH in the first place. “The poor merchant really does pay a price for [cards],” Atkinson notes.
PayPal conceded last week that its costs will likely increase starting next year because of the pact with Visa, but remained silent on whether its own fees might rise to recover some of that cost. “Somebody has to pay for the rewards,” Atkinson points out.
She agrees Scharf has a point about disintermediation, given that consumers most often deal with a bill-payment service or other company rather than with the banks that operate in the background to make the transfers work. But Visa-issuing banks have been “disintermediated” as well, she argues, since most consumers identify their cards as Visa cards rather than as products from their bank.
Estep, too, points out that consumer confusion is as likely with cards as with the ACH, since either method can be used to fund a PayPal account before a payout to a merchant. “The final payment to a second party is made by a transaction separate from that funding transaction,” says Estep. “So, if a payment is ‘disintermediated,’ it is done so for all types of funding transactions, ACH as well as cards.”
As for Scharf’s point about call centers that “don’t understand information and things like that,” Atkinson says there is some truth in the remark. Since the ACH was not originally created as a consumer-facing network, she says, some banks are likely to fumble consumer inquiries when things go awry. Banks’ main call centers, she says, are inclined to transfer consumers with ACH questions to a “back-office ACH” customer-service center. “That call center is less able than the card call centers,” she notes, to deal with such inquiries.
As for PayPal, the new deal will certainly raise its costs, but Atkinson argues added payment volume could offset that result. “I would say it’s going to be pretty close to a wash for PayPal,” she says, a sentiment that might reassure investors who punished PayPal’s stock the morning after the agreement with Visa was announced. “[PayPal’s] whole business model was leveraging the low cost of the ACH,” Atkinson says. “And the ACH will still be offered, it just won’t be at the top of the list.”