According to Visa USA, its decision to create two categories of ATM interchange is a response to a changing marketplace that is designed to better balance the economic relationship between issuers and acquirers.

Visa made the change after determining that there were "significant differences in ATM portfolios, in terms of cost, security and cardholder value," said Stacey Pinkerd, senior vice president of Visa's Consumer Debit Products.

During a presentation at the recent ATM Industry Association East conference, Pinkerd said the intent of the tiered interchange policy is to encourage operators to deploy "higher function, more secure ATMs that provide a better value for cardholders" rather than the low-end cash dispensers that have proliferated since 1996, the year Visa and MasterCard lifted their bans on ATM surcharging.

Unfair advantage?

Many independent ATM operators, however, see Visa's move as a way of unfairly tipping the balance in favor of the largest banks, which are some of Visa's most powerful members.

This article is supported by: Qualtex Manufacturer of the WeatherMaster™ line of Through-the-Wall ATMs, offers Distributor Programs for its ATMs, Accessories and Walk-Up/Drive-Up Kiosks.

"It's an entitlement," said Frank Lunn, president of Kahuna Business Group, an Illinois-based independent ATM operator with some 5,500 machines under contract. "(Visa is) giving this to the banks because the banks can't compete fairly with the ISOs."

"The issue isn't that Visa has amended a policy, it's that they've amended it selectively to suit the needs of a particular audience," said Ron Gerstley, president of ATM Enterprises, a Maryland-based independent operator with 125 machines under contract.

While Pinkerd characterized the change as a way of improving the cardholder experience with more services at ATMs, Gerstley said one possible effect may be the removal of machines from low-income areas not traditionally served by banks.

"ISOs are providing a service in a lot of underprivileged areas that the banks don't want to touch. With the lower interchange, some of those machines just won't remain viable," said Gerstley, who estimated that about 20 percent of his machines are in "borderline" locations. "That's going to end up hurting the people who can least afford it. It's just wrong."

Some ISOs may respond to the loss of interchange by increasing ATM surcharges, Gerstley said. "It's hard to see (increased user fees) as customer friendly."

Russell Pandina, director of operations for Montana-based Bancard Systems, suggested that banks will be able to improve their bottom lines in a way less obvious to cardholders. "They'll keep a dime of the interchange, but how many of them will pass along those savings to their cardholders by lowering their foreign fees?" he said.

Making the cut

Under the new policy, which will be implemented in October, at least 50 percent of an operator's network must meet four of five infrastructure criteria established by Visa to qualify for Tier 1 status and receive the current interchange rate of 50 cents for cash withdrawals. Those with networks that do not qualify will receive the new Tier 2 interchange rate of 40 cents for withdrawals.

The Tier 2 rate for balance inquiries also will fall, from 25 cents to 20 cents.

Visa's infrastructure criteria are: dedicated camera surveillance, a shared lock, an Underwriters Laboratories 291 Level 1 safe, non-dial telecommunications network and armored car cash replenishment for off-premise ATMs.

Operators with networks that meet three out of five of the criteria may still qualify for Tier 1 interchange if their ATMs meet three out of four of Visa's cardholder value criteria: 50 percent of machines offer deposits; 75 percent of ATMs have 24-hour access; 50 percent of ATMs offer multiple account selection; 50 percent of ATMs offer more than one language.

Visa began distributing registration packets last week, to its principal members and to members who sponsor ATM operators into the Plus network. Operators who believe their networks will be classified as Tier 2 don't need to do anything, Pinkerd said. Those who wish to apply for Tier 1 status must do so by June 15. Operators will have an annual opportunity to apply for Tier 1 status.

Industry experts agree that few ISOs, especially those with small- to mid-size ATM portfolios, will qualify for Tier 1 status. Most financial institutions will likely qualify because they offer services mentioned in Visa's cardholder criteria at most branch machines.

Yet qualification may be far from automatic for some banks. Ron Tiberio, vice president of electronic banking for First American Bank, an institution with 30 branches in the Chicago area, said few of his non-branch ATMs would meet cardholder criteria. He will likely meet the infrastructure criteria -- but only because he is migrating most of his machines to TCP/IP. Only 60 of First American's 300 ATMs are located at branches.

Tiberio said First American "has been getting squeezed by the ISOs for years." However, he added, "I don't want Visa to make rules to tip the scales in my favor. I just want to compete on an even playing field."

Most ISOs could qualify for Tier 1 status at sites where high transaction volumes warrant using an armored car company for cash replenishment, TCP/IP communications or other measures mentioned in the Visa criteria, said Jason Kuhn, director of operations for WRG Services, an Ohio-based independent ATM operator. He suggested ISOs should receive Tier 1 interchange at those machines.

It would be "too difficult to manage distribution of interchange at the device level," Pinkerd said.

Marilyn Kilcrease, president of Creative Card Solutions, a consulting firm that works with financial institutions that sponsor independent ATM operators into networks like Plus, does not believe Visa's new interchange policy will improve security at ATMs.

While Visa's Interlink and other networks have long maintained tiered interchange pricing for credit and debit transactions, she said those rates are tied to issuer and cardholder risk. For instance, acquirers pay more for transactions in which cards are not present.

"These standards for ATMs don't have anything to do with issuer or cardholder risk," Kilcrease said. "If an acquirer wants to use an ATM with a business-hours safe (rather than a Level 1 safe), that's not going to affect the cardholder experience at all. The only one experiencing any risk there is the acquirer."

Incentive or penalty?

While Pinkerd told a crowd at the ATMIA conference that the new policy was "not a penalty," Kilcrease said it was hard not to view it as such.

"If they didn't want to penalize anyone, they could have left the Tier 2 rate where it was and raised the Tier 1 rate," she said.

ATMIA endorses that approach in a position letter posted on its Web site. "If you want to reward those ATM providers that have a portfolio of ATMs that are primarily full function, with higher security elements, higher cost equipment and greater functionality, then we would suggest increasing the interchange by 25 percent for those ATMs, while leaving the current interchange as is for all others," the letter reads.

"I don't think it should be up to Visa to slow down the ISO market," said Mike Lee, ATMIA's chief executive. "What is wrong with lower-function ATMs if that's want consumers want?"

Basic cash dispensers "provide a lot of value," Pinkerd said. "But do they deserve the same level of reimbursement? We believe it's appropriate to recognize the differences in ATM portfolios and establish a reimbursement structure that reflects them."

It remains to be seen whether MasterCard or regional EFT networks like Star or Pulse will follow Visa's example. A spokesperson for Star parent First Data Corp., said Star's current interchange rates of 54 cents for withdrawals at off-premise ATMs and 46 cents at branch ATMs will remain in effect for 2005.

Leslie Evans, product development director for Credit Union 24, said the network "just went in the opposite direction," raising interchange for withdrawals at off-premise ATMs from 55 cents to 57 cents.

Visa's Plus, which many ISOs use as a "last resort" in routing transactions, will likely become even less popular among independent deployers. While several ATMIA attendees suggested that ISOs should consider dropping Plus entirely from their machines, others did not see it as a realistic option.

"Ten percent of my transactions go through Plus," said Neil Johnson, president of Texas-based International Merchant Services. "I'd be an idiot to cut 10 percent of my gross revenue and 10 percent of my customers' dispensed funds."