Georgia's New Merchant Acquirer Bank Charter: "Wait and See"

The creation of a first-of-its-kind merchant acquirer bank charter in Georgia last March generated considerable initial interest within the payment processing industry, but non-bank payment processors that want to establish themselves as specialty Merchant Acquirer Banks (MABs) under the law must wait until the Georgia Department of Banking and Finance issues implementing regulations. The new law was intended to permit non-bank payment processors to more effectively compete with large financial institutions that also offer payment card processing services to merchants.  Recent consolidation in the payment processing industry in the United States, as well as relaxation of the bank sponsor requirement by the major payment card networks as a result of new legislation in the European Union has led to speculation that the U.S. payment services market is ready for a new type of entrant.

Traditionally, the Visa and MasterCard payment network rules have required non-bank card payment processors to partner with a sponsor bank in order to process transactions.  These rules were initially created under the assumption that financial institutions are better equipped to manage the risks associated with payment card processing.  The Georgia law was designed to minimize these risks. For example, the new MABs would not be permitted to engage in consumer banking or other types of lending.  In addition, unlike some state credit card bank laws that permit large retailers to form banks and issue credit cards, no MAB would be permitted to “self-acquire” – to conduct payment transactions on behalf of itself or a parent company or merchant.  A MAB would be limited to the “various activities associated with effecting transactions within payment card networks”, including:

• Obtaining and maintaining payment card network memberships;
• Underwriting merchants to accept payment card transactions;
• Providing the infrastructure to authorize transactions at merchant locations; and
• Facilitating the clearing and settlement of payment card transactions with issuing banks on behalf of merchants.

The new MABs would become one-stop, single-purpose payment card transaction shops in a mature industry that competes on efficiency and low-cost transactions for client merchants.  Assuming the payment networks would permit MABs to process transactions on behalf of their merchant clients the new entity cwould theoretically lower transaction costs for merchants.

Two major sources of uncertainty remain for MABs.  First, the Georgia Department of Banking and Finance must issue implementing regulations in order to receive and process applications and supervise any new MABs that are chartered.  The complexity of the risks in the evolving business of merchant acquiring and the possibility that a new MAB would not be supervised by the FDIC (meaning the Department must be prepared to supervise the entities on a standalone basis) have doubtless slowed the pace of draft regulations, which have yet to be proposed.  Second, again presumably due to a need to assess the risks more carefully, the payment networks have yet to announce what capital, reserve, and other risk-mitigation measures they will impose on MABs.

Charter Landscape for Merchant Acquiring

Choosing the type of charter for issuing or acquiring activity is complex, but according to public sources using a state-chartered entity remains unusual for the major players in the industry.  Below are the top ten payment card issuers in the U.S. (by purchase volume), followed by the top ten payment processors (by transaction volume).  With a few exceptions, both segments are dominated by very large financial institutions with national charters and footprints.