U.S. Retailers Should Watch Visa's TIP

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

Visa's recently announced Technology Innovation Program (TIP) made a lot of news, but it is not the PCI equivalent of a get-out-of-jail-free card for merchants. Simply put, TIP won't mean much until the other card brands make a similar move, it doesn't change the requirement for merchants to be PCI compliant at all times and (perhaps cynically speaking) it doesn't really cost Visa or its issuers anything.

U.S. merchants will want to monitor this program and see both how it develops and how it might be adapted for the U.S. market. Because I am not qualified to comment on anything even remotely political, I'll not comment on Visa's explanation of the reasons TIP is not even being offered in the U.S. However, I have to wonder whether there are long-term implications for U.S. merchants and PCI in general.

On the one hand, TIP could prove an incentive to move the U.S. to the EMV standard for all payment cards. On the other hand, I worry about a darker scenario, in which the U.S. market becomes an isolated island in the PCI world where only its merchants are required to validate their compliance annually. Such a situation would be unfortunate for PCI and payment security in general, generate widespread U.S. merchant resentment and reinforce the incorrect view in some parts of the world that PCI is just a U.S.-focused standard.

Under TIP, eligible non-U.S. merchants can skip re-validating their PCI compliance each year, at least for Visa. I expect there will be pressure on the other card brands to develop their own TIP-like programs. The reason is that until MasterCard and American Express, in particular, make a similar move, TIP will have no benefit for merchants because these brands will still require annual PCI compliance validation.

Visa set the bar pretty low for merchants to qualify for TIP. Merchants need only be based outside the U.S. and have completed (and passed, presumably) one PCI assessment, which all Level 1 and 2 merchants were to have done by Sept. 30, 2010. However, all a merchant needs is "a defined remediation plan for achieving compliance based on a gap analysis," and it can still qualify. Additional requirements are that merchants have at least 75 percent of their transactions from Chip card terminals and that they don't store sensitive authentication data like the CVV2 or PIN (which they should not be doing anyway).

It is important to note that TIP does not give qualifying merchants a free pass on PCI compliance. TIP says only that merchants no longer need to validate their compliance (again, only as far as Visa is concerned). Visa's bulletin goes to great lengths to emphasize that merchants still need to be PCI compliant at all times. To me, that means those merchants still need quarterly vulnerability scans, annual penetration testing, daily log reviews and all the other ongoing daily, weekly and monthly PCI compliance actions.

Furthermore, in the case of a cardholder data breach, qualifying for TIP doesn't buy merchants anything. The same fees, fines and penalties as exist today will apply. And should a merchant's "risk conditions change dramatically," Visa can boot that merchant (or class of merchants?) out of TIP and go back to requiring annual compliance assessments.

TIP, therefore, may put acquirers in an uncomfortable position. Under TIP, Visa is going around its acquirers and telling merchants directly that they don't need to re-validate PCI compliance. Visa continues, however, to hold the acquirer responsible for any data breach. If I were an acquirer and a card brand told my merchant it didn't have to re-validate PCI compliance and that merchant got breached, I would not be too happy about getting fined and then having to pass that fine on to my merchant.

Best of all for Visa, TIP costs it and its card issuers nothing. As I noted above, TIP does not remove the fines and penalties in the event of a cardholder data breach. Additionally, previous incentive programs involved the card brands offering merchants an incentive or a discounted interchange reimbursement fee to implement new technology (e.g., magnetic stripe reading POS terminals) or use a risk-reduction offering (e.g., address verification service). In these cases, the card issuers either bore some of the costs for, or shared the benefits with, the merchant community.

In the case of TIP, though, a card brand is simply repealing a compliance cost that it (and all the card brands) added with the requirement for PCI compliance. And actually, TIP only peels back a part of that cost, because PCI compliance is still required: Qualifying merchants can save only the money they paid their QSAs for their validation. I don't know what part of the total PCI cost this is, and I am sure it is significant, but I have to believe it is becoming a smaller part of the total cost of compliance.

Assuming the other card brands follow Visa's lead, I wonder what impact TIP will have on adoption of EMV standard cards in the U.S. and other magnetic stripe markets. The potential cost savings would seem to be a powerful incentive for issuers to issue Chip cards and merchants to upgrade their POS to accept them. On the other hand, if this program gets tangled with politics and other agendas, TIP may be something U.S.-based merchants can only look at from afar.

What do you think? I'd like to hear your thoughts. Either leave a comment or E-mail me at [email protected].