Choose Your Retail Threats Carefully

As the big Sept. 30 deadline for retailers to comply with credit card security rules, Visa and others ponder the carrot-and-stick argument.

The most thankless job in corporate America today is the middle manager who is instructed to enforce a policy, but is giving no real power nor the resources to do it.

That manager can't fire anyone, nor can he/she significantly influence anyone's raise or bonus. In short, the manager has few tools other than begging, pleading and other low-cost persuasion tactics. The hypothetical fact that the policy being enforced is good for the employees and the company won't help much.

Sometimes, that manager will threaten to cut off some valuable resource to the people he's trying to persuade. As the self-selected deadline approaches, that manager gets very nervous. What if the action is seen as overly punitive and it ends up undermining the middle manager's influence, thereby condemning him to failure? Just because he can't fire doesn't mean he can't get fired.

Even worse, what if he makes good on his threat and the employees discover they can do quite well without it. He then has little left to bargain. But once he's made the threat, he's stuck with it.

I'm using that sad tale to point out that we're in the middle of two very interesting deadlines set by Visa in connection with the Payment Card Industry (PCI) council, the group that is trying to enforce industry standards on retail credit card security procedures.

A few days ago?on July 31?it was the deadline for some 6 million of the nation's smallest retailers to report whether they're compliant with PCI standards. It's an interesting group called Level 4.

Although it's the group that includes the smallest merchants in the U.S., many of them are not that small. It could include a retailer that makes 999,999 Visa transactions a year, including as many as 19,999 E-Commerce transactions. So it's important to remember that this group isn't solely mom-and-pop hardware stores and Oliver's Bait Shop.

Although those retailers represent only about a third of all of the Visa transactions, they account for some 80 percent of that credit card's data breaches. Suffice it to say, Visa officials are expecting the compliance numbers to be quite low.

This is low even though those retailers have the option of doing self-audits. Let that sink in a moment. Isn't there something inherently contradictory about a self-audit? This isn't putting the foxes in charge of the henhouse. This is the farmer telling Chief Hen Protector Fox, "We just accepted a huge load of chickens. I have no idea how many we have. In the morning, report to me how many there are. I trust you."

Oddly enough, the main complaint about self-audits isn't an honesty issue. It's an ignorance issue, with some complaining that those filling out the self-audits rarely understand the full intent of the questions.

In several weeks, Visa should have the latest stats on how compliant those six million retailers think they are.

The more interesting imminent PCI deadline is on Sept. 30 and it's when Visa has been threatening to start fining non-compliant Level 1 retailers, albeit indirectly. (You didn't think I was ever going to get to the anecdotal lede of this column, didn't you? Ye have little faith.)

Officially, Visa will charge penalties to credit card acquirers, who will have the option of passing those fines along to the retailers whose non-compliance prompted the fine. Those fines from Visa will max out at about $25,000 per month. Retailers have little to worry about as long as they believe in the generosity and charity of executives working for major banks. Yeah, not an especially likely scenario.

Sept. 30 is for Level 1. Level 2 retailers have until the end of the year to sweat.

Visa has also offered a bribe alternative, with lower credit card costs (lower interchange rates) for those who become and stay compliant.

Between the two programs, the carrot incentives are likely to work a lot more effectively than the stick fines.

Why? First, the math clearly shows a much more persuasive financial impact for those major retailers saving those pennies off of every transaction. Secondly, the threats are likely to alienate the very retailers whose cooperation is needed.

The kind of fines we're talking about are likely to cost these Level 1 retailers a lot less than paying for the security investments to make themselves compliant. Visa and the PCI Council are refusing to publicly identify the delinquent retailers?for good reason?so if they can stomach the fines, it can be the more cost-effective route to take.

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