Beware Falling Into The PCI Service Provider Trap

A 403 Labs QSA, PCI Columnist Walt Conway has worked in payments and technology for more than 30 years, 10 of them with Visa.

Under what circumstances does a retailer become a PCI service provider? What about a shopping center operator that provides telecom services that its tenants use to authorize card payments? Consider, too, a college or university that outsources its bookstores or food court to a third party that continues to use the school's network.

In the world of PCI, service providers are different from retailers. Retailers accept payment cards for goods and services, whereas service providers help enable those transactions by storing, processing or transmitting cardholder data for the merchant. Another difference is that merchants validate their compliance to their acquirer, while service providers submit their Reports on Compliance (ROCs) to the card brands. In the real world, these roles may get muddled, with merchants unwittingly crossing the line and becoming service providers.

PCI DSS dictates that if you provide services that either control or could impact the security of cardholder data, you are a service provider. This definition includes services that are part of the authorization or settlement process (e.g., everything from managed firewalls and Intrusion Detection Services to hosting an order page on the Web) as well as services that occur after the transaction is completed (e.g., loyalty tracking or order processing).

When a retailer or any merchant crosses the line and becomes a service provider, it may not necessarily encounter any new PCI requirements but will expand its PCI scope, possibly quite considerably. That company also increases its risk and the cost, complexity and effort it takes to validate PCI compliance. Lastly, one of these retailers might cause its acquirer to ask questions, because its merchant agreement with that acquirer likely does not cover these non-merchant activities.

The most obvious case of merchant-as-service-provider is a franchisor that has both company- and franchisee-owned stores. It frequently provides advice and maybe network or point-of-sale (POS) facilities to its franchisees. But retailers, too, often host unrelated businesses (I've seen everything from a Starbucks to a medical clinic) on their premises.

Where is the line? At what point does a merchant morph into a service provider?

I don't have all the answers. But I do know that in some cases a merchant can clearly cross over the line and act as a service provider. The point at which we draw that line will depend on the merchant's particular, even unique, circumstances.

Let's start with the case of a franchisor that has both company- and franchisee-owned stores. Because the franchisor owns some of the stores, it is a merchant. It will validate its PCI compliance based on its merchant level (see more, below), counting only the volume of the company-owned stores.

Franchisors are concerned about their brands. Newspapers don't care if a breach occurs at a franchisee- or a company-owned store. The franchisor's name makes a better headline and, unfortunately, it has deeper pockets. Therefore, franchisors want to make sure their franchisees are secure and PCI compliant. But how far can the franchisor go? What additional help, advice and services will have the unintended consequence of causing a franchisor to become a service provider?If you provide franchisees their POS equipment, host them on your network and link them to their acquirer, or otherwise facilitate their POS functions, you may protect your brand. However, you will likely also become a service provider. On the other hand, if you provide, say, PCI training and maybe a master contract for vulnerability scanning, in my opinion, you should be in the clear. Just about everything else is a gray area.

The difference is not academic. Even a large franchisor could easily be a Level 2 merchant (under 6 million Visa or MasterCard transactions per year) and, therefore, be able to self-assess even under the new MasterCard rules.

The game changes, though, when this same franchisor becomes a service provider. Now it likely is a Level 1 service provider (300,000 transactions per year, or maybe just a single transaction if it falls under MasterCard's Third Party Processor definition), which means an outside assessment culminating in a ROC prepared by a QSA. The brands' listing fees for Level 1 service providers add further costs.

Retailers that host unrelated third parties on their premises face a similar situation. If they provide that health clinic or florist or video rental shop located in their stores access to a phone line and nothing else, they should be fine. If, however, the retailer has any visibility into that third-party's transactions (including providing basic IT support for POS systems or the like) or provides systems or services to enable authorization or settlement, it would fall under the definition of a service provider.

As a retailer, you want any third party in your environment to be secure. But you need to be careful. If you help too much, you will get drawn into this service provider trap. The same concern applies to other parties, including shopping center operators, colleges and universities, and even government agencies that execute master contracts for a variety of agencies and departments. Is a state government a service provider?

The wild card in this situation is Visa. As reported earlier by my fellow StorefrontBacktalk columnist Todd Michaud, "Visa announced it is creating a new category of service providers to cover franchisors that offer PCI-related services to their franchisees." I have no insight into what Visa is contemplating. However, I hope Visa considers all the other possible merchant/service provider combinations as it drafts plans. Any change or modification to the service provider definition may clarify the situation for franchisors. But it could also unintentionally impact many other merchants.

Do your stores host unrelated businesses? What facilities do you provide? If you are a franchisor, how do you manage this delicate balance with your franchisees? I'd like to hear your thoughts. Either leave a comment or E-mail me at [email protected].