Visa Relaxing Its Retail Credit Card Security Threats

For more than a year, Visa has ominously warned large retailers that it would enforce a strict Sept. 30, 2007, deadline for many of the nation's largest retailers to either be certified that they comply with industry credit card security requirements or face fines and being expelled from discounted credit card fee programs.

But as the deadline has gotten closer?and the percentage of retailers certified as compliant is still quite low--Visa has been forced to back off, albeit slightly.

In an attempt to boost the number of Level 1 retailers certified compliant with the Payment Card Industry Data Security Standard (PCI DSS, often referred to simply as PCI), Visa last December unveiled a series of incentives to bribe retailers into cooperating, given the lack of success that solely using fine threats was having.

A big part of those incentives was offering compliant retailers sharply discounted credit card transaction fees, in a program called the Visa PCI Compliance Acceleration Program (PCI CAP).

This month, Visa has been quietly floating memos that will soften the pain for non-compliant retailers, as it's become clear that non-compliants will have strength in numbers come early October.

One such memo came from major card processor Fifth Third Bank. "Visa?s initial program announcement stated that, effective October 1, 2007, non-compliant merchants will no longer be eligible for Visa" reduced transaction fee programs, the memo said. "Now, according to Visa?s clarification on their policies regarding tiered interchange qualification and fines, merchants that have not validated full compliance by September 30, 2007, will no longer qualify for the best available tiered interchange rates. This means that Visa (transactions) submitted from non-compliant merchants, that are normally eligible for tiered interchange, will be downgraded one interchange tier."

Neither representatives from Fifth Third nor Visa agreed to elaborate on the memo or the changes. Given that discounts and incentives vary from retailer to retailer, it's difficult to say how much of a dollar or percentage impact this change will cause. But it clearly is a softening of Visa's position.

Visa has been struggling getting retailers to comply with PCI due to quite a few PCI hurdles that many retailers resist.

The softening of the discounted transaction (interchange) fee is not the only indication of Visa blinking. The fines for non-compliance, which were initially represented as absolute, are also being toned down, with banks being vague about how many of the nation's non-compliant retailers will actually get fined come October 1.

"I think the change is reasonable. Allowing retailers to demonstrate 'best efforts' is a realistic acknowledgement that software changes--and roll-outs across enormous retail chains--don?t happen overnight," said Paula Rosenblum, retail analyst with Retail Systems Research. "It?s not like Y2K, where the date is going to come and nothing can change it. There can and should be some flexibility here. And given the somewhat tepid response to the TJX breach, Visa is better off being nice, rather than baring its teeth. "

Another change in the Visa policy mentioned in the Fifth Third memo is less explicit, but is still potentially meaningful. For the retailers who are not compliant by October 1, Visa is offering those merchants "a payment in an amount up to the most recent three months of their tiered interchange differential."

What must retailers do to win this lucrative payment? "To qualify, an executive-level officer must attest that the merchant has made best efforts toward compliance, including reviewing opportunities to accelerate the planned compliance date, and confirm their target compliance date, by September 30, 2007."

That wording was vague and non-explicit, but it appears to be a liferaft for retailers who are not compliant but still want the incentive dollars. If they merely promise to comply?it appears crossing your heart and hoping to die is optional?that seems sufficient for a payment to be considered. It's unclear if the payment would be paid right away or if it would be held until actual compliance was proven. A strict reading of the memo would suggest a sooner payment because if the banks were going to wait until compliance was proven, there would be no reason to request this declaration from one of the retailer's executives. This presumes, of course, that the memo writer was precise in his/her phrasing, which is not always the case with memo writers.

Steve Rowen, a security analyst who is also with Retail Systems Research, said this is clearly a response to the lower-than-hoped-for compliance numbers.

"Visa predicted that by December 2006, two-thirds of Level 1?s would be compliant. Up until very recently, Visa has been telling us that this was and is the case. We then found that number to be 28 percent and even that was soft," Rowen said. "So this change is really not that significant. Very few were going to be compliant at the end of September, interchange hike or no. Ask anyone who has attempted their 12 step program and they?ll tell you exactly how horrifying the reality is of where data exists. To do this effectively ? beyond just compliance ? takes an awful lot of money, cultural change and, quite simply, time. That?s why we?ve been pounding the drum so loudly on this, and getting the incredibly small few that have done their diligence to help share how exactly they did it."