Opening the Rails of Open Loop Networks

It was 1997 when the VP at Qwest Communication International's Prepaid Division asked me if it would be possible to create a point-of-sale activation network that wouldn't require the merchant to install any new hardware or software but could still activate a long distance phone card.  This was the same question the division manager at MCI Prepaid had asked me in 1996, but MCI had such a hodgepodge of back office systems that complicated the answer to a degree that warranted it unachievable.

But with Qwest, they had a single platform.  One place that controlled the database of PINs and card numbers that would allow for a single point of entry.  At Qwest, the marching order could be achieved.  All we needed to do was get our hands on a 'credit card-like' BIN and have the network keep it out of settlement.  This used to be called pre-auths and it was a standard fare offering in ISO 8583.  But in 1997, that wasn't the case.  Nevertheless, it was clear we needed the type of BIN that any new bank or credit union wanting to launch a new credit or debit card program carrying the Visa or MasterCard logo would need.

The Qwest VP wanted his sales people to be able to walk into any merchant's store and without that merchant doing anything differently, have the ability to activate the Qwest long distance phone card.  The VP envisioned the following scenario:  My sales person walks into a merchant store and asks the merchant to attempt to make a long distance call with the card the salesperson would hand to that merchant.  The merchant would take the card, dial the toll-free number, input the PIN as printed under the scratch-off area on the card and then enter the destination phone number.  The call would fail.  Then, the Qwest salesperson would ask the merchant to swipe the card through the merchant's EXISTING POS terminal, enter a penny in the value field (POS terminal downloads will stop a transaction if there is no dollar amount entered into the value field) and send the transaction through for authorization.  The message back would say, "APPROVED."  The salesperson would then ask the merchant to attempt to make the call again.  This time, the call would go through.  The merchant would stand there in amazement, wondering what magic the salesperson had performed under the merchant's very watchful eyes.  It was a powerful selling tool for Qwest Prepaid. 

Qwest's bank at the time was Bank 1, which just happened to have a board seat with Visa.  So we approached the bank and got a good reception.  And they approached Visa and got the same kind of reception.  Both companies allocated resources and began discussions to determine how the transactions would be kept out of Visa's Base II settlement system.  That was in January 1998.  By August 1998, we had a working system that Qwest called SAFER - Secure Activation for Every Retailer.  About 8 years later, Qwest sold their prepaid portfolio to IDT.  Once again, the telephony-centric folks at IDT had not a clue what this SAFER thing was all about.  So they put it on the shelf. 

Meanwhile, my partner brought Mellon NSD to InComm with the same concept.  This was right around the time NSD was getting sold to US Bank, which is where it sits today under Elan Financial Services' umbrella.  This means that InComm has had a 4-series Visa BIN since 1999.  InComm's IT unit, having spent their lives in telephony, didn't use the asset to its fullest extent.  They simply didn't know what they didn't know.  And they were also fearful (or mindful) of the Dorf patent, something MasterCard licensed but Visa hasn't even acknowledged (at least not that I know of).  But that InComm BIN is still out there and can be used for non-financial transactions.  Something I called 'event notification' (which will be topic for another time - there's a whole business here in getting non-financial transactions from existing POS infrastructure).  Indeed, I worked for a start-up in the early 00's and we used the InComm BIN to distribute funds via gift cards to settle a class action law suit against Toshiba where the card could only be used at Best Buy, Circuit City, DAC/Insight, CDW and Comp USA.  It worked like a dream. 

So here we are more than 10 years later and we still don't have the ability to exploit the grand networks that the payments industry has created over the past 40 years to accomplish anything more than what it set out to do.  Now that's progress!!  But why?  Why can't we use these networks to perform other transaction types that have meaning to both the merchants and the vendors that sell to them.  Why did Blackhawk and InComm have to go through the machinations of building host-to-host interfaces to these merchants in order to sell their gift cards from their GCMs?  Why, indeed, didn't Visa and/or MasterCard rule the roost in terms of POS activations - something the telephone industry dubbed POSA.  This question is particularly applicable to InComm - who will tell you that they just couldn't achieve the flexibility with their US Bank 4-series Visa BIN that they could with a H2H interface.  Ok, fair enough.  But why!!!!???

The answer lies with the card networks' Fraud and Risk management departments.  Sometimes it rests with the brand cops.  You know, those people in Purchase and San Francisco who think that if the brand isn't accompanying the transaction, the transaction must be invalid.  Not worthy of routing.  Not helping the cause.  And who cares whether it makes us money or not?

Clearly, at the outset, this kind of thinking was applicable, particularly when the networks were 501c3 companies.  These are (or were) the kind of companies that need to spend every nickel they make because they're NOT-FOR-PROFIT. 

Today, the landscape has changed.  And because they are now FOR PROFIT companies, sooner or later their new shareholders will start asking the question that every subordinate has ever heard from any supervisor - WHAT HAVE YOU DONE FOR ME LATELY?  And something tells me the answer isn't going to lie with the people who are in charge of protecting the brand.  Nor will the answer lie with those who are responsible for protecting the integrity of the transaction, although I have to admit, the role of the anti-fraud and risk management people strike me as something that will always be needed. 

While branding will remain important, it won't be the be all and end all of it all.  Which means the branding cops will have to re-think how they approach the branding issue.  That is, it's no longer just about the brand.  It's now about exploiting the great and comprehensive infrastructure we've spent the past 40 years or so building.  It's about time for us to exploit the opportunities that are staring us in the face and that we've been prevented from exploiting because of our fears, whether those fears emanate from risk or just plain brand positioning. 

I think it's time we begin allowing non-financial or event notification transactions over VisaNet and Banknet.  It will create new revenue streams for both networks, give them an ability to differentiate themselves (something they've always struggled to do) and give the entrepreneurs another venue to pursue.  And it has an awful lot of implications for all of those who are attempting to figure out the reload issues for the general purpose prepaid programs already in the market. 

Peter Quadagno
peterq@quadagno.com