Early last week, the news broke of the removal of Shlomo Zohar as chairman of Israel Discount Bank (TASE: DSCT). Zohar is also chairman of credit card subsidiary Discount ICC.
A senior source at Discount Israel Credit Cards-Cal Ltd. (ICC-Cal) has informed “Globes” that the decision by controlling shareholder Edgar Bronfman to remove Zohar from his post grew firmer following an investigation by “Globes” which pointed to anomalies in the management of the clearing of credit card transactions on the Internet at ICC.
As chairman of the ICC board, Zohar was personally involved in business decisions at the group, together with CEO Boaz Chechik and Steve Greenspan, CEO of Cal International. Greenspan left his position at the beginning of October, a few days after the publication of the second part of the “Globes” investigation. Rani Rahav, spokesman for the Bronfman group, said today in response to the report that there was no connection between the two events.
Following the “Globes” investigation, Visa International fined ICC €9 million for deviations from the electronic commerce rules. ICC reported this morning that in the wake of the affair additional fines of up to €3 million were likely to be imposed on it.
”Globes” has learned that last Thursday, Visa Europe president and CEO Peter Ayliffe came to Israel for a series of tough meetings with ICC management. Ayliffe is due to leave Israel this evening or tomorrow. Discount’s announcement to the stock exchange about the sanction imposed by Visa International was published in conjunction with Ayliffe’s visit to Israel.
Last week, Ayliffe wrote to ICC that he expected the company to act determinedly to deal with the irregularities and to implement the risk reduction plan to which it was committed. Ayliffe gave ICC three months, until the end of February 2010, to deal with the problem. After the letter from Visa was received, an urgent board meeting was convened to take the necessary steps.
”Globes” has also learned that at a meeting in London at the beginning of September to which Chechik was summoned (at which ICC was fined $3.5 million), Visa International also imposed on ICC an absolute prohibition against accepting new businesses for Internet clearing until Visa International completed its investigation into the affair. This is a highly unusual prohibition, implying lack of faith on Visa International’s part. ICC said today that the prohibition would end unconditionally on December 15.
The fine that ICC reported today was imposed because of the activity of several clearing companies and not just one. The company said this morning that a substantial part of the clearing problems for which the fine was imposed was related to transactions connected with Internet clearing companies owned by Nathan Jacobson, who owns PayGea, sponsor of Maccabi Tel Aviv football club.
ICC expressed concern at the possibility of similar sanctions from Mastercard, which has still not announced such steps but is looking into the affair. Mastercard is regarded as stricter in the clearing market.
ICC has already paid part of the fine, amounting to €2.5 million. The company is 71.2% owned by Israel Discount Bank and 28.8% owned by First International Bank of Israel.
Talking to “Globes” today, Chechik commented candidly on the problems. “This is a serious and exceptional incident, and it’s a pity that it happened, but such things do happen. We knew two and a half months ago, even before there was a general picture, that it was a serious incident and we began to fix things with determination and uncompromisingly. Today I can say that we have identified all the businesses that caused the problem and have ejected them from the system; we have stopped working with them. I believe that we will be able to show the people at Visa Europe that we are abiding by the rules and that we will meet the timetable set down for us.”
Do you take personal responsibility for the failures that have been revealed?
”I have responsibility for problems at the subsidiary arising from my position as CEO of the parent company. Therefore I managed the crisis personally and took action to avoid further risks and apply the lessons.”
What financial damage has the been caused to the company?
”There is no doubt that there is some damage, but it is limited, and we have made provisions against most of it. It will be reflected in the financials, but it will not have a substantial effect on the company’s 2009 results. We have the ability to get the money back from the businesses.”
The problematic clearance was carried out by subsidiary ICC Assets, which is responsible for ICC’s electronic commerce activity. The activity is mainly in the clearance of transactions on Internet sites, chiefly in gambling, soft pornography, and medicines. ICC is the only credit card company in Israel active in this area, which provides 16% of its total revenue and 26% of its net profit.
Steve Greenspan, resigned as CEO of ICC Assets at the beginning of October. Officially ICC said his resignation was due to the wearing pressure of his job, but today the are prepared to admit at the company that he left because of his responsibility for the failures in clearing of food supplement transactions, and that had he not resigned he would have been fired on the spot.
The reason for the fine was that the company reached a 7% rate of charge back, when the accepted rate is 2%. Visa fined ICC $100 for every charge back. Charge backs are significant in Internet commerce, which takes place without any face to face transaction. The products in question are such things as teeth whiteners, creams, slimming tea, and so forth. “People buy, and after a couple of months see that the thing doesn’t work, and so they cancel the transaction, or deny that they committed to making purchases over time,” is how Chechik explained the problem in the past.
ICC also reported that it had received official notice from Visa International that if the company failed to abide by the program and breached the rules of the organization, revocation of its international clearing license would be considered, and, in an extreme case, cessation of its membership in the organization., but ICC views such outcomes as unlikely.
Clal Finance research department manager Yuval Ben Zeev believes the incident may affect ICC’s upcoming IPO. As revealed by “Globes”, ICC seeks to make an initial public offering in April 2010 amounting to 20% of its shares, at a value of NIS 3 billion, before the money. Ben Zeev raises a question mark over the pricing of the offering. “It’s not a catastrophe, but it certainly raises disturbing questions about risk management at ICC.”
Published by Globes [online], Israel business news - www.globes-online.com - on November 15, 2009
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