If any business receives an unsolicited phone call, e-mail message, text message, or social media request from an individual claiming to be a MasterCard Security representative, do not to respond. Report the fraudulent inquiry to MasterCard using the following e-mail address: datasecurity@mastercard.com.

What is known…

Most likely a parking garage, or network of parking garages, suffered a data breach, most likely in the state of New York. Global Payments was most likely the processor for this business. That’s about it!

Here’s what the media shows:

Point being, that some publications like to blow the proportions of a story out of the water before there’s any fact to the story. Time will tell what has actually happened and it may be a very bad situation. But, the difference between 50,000 cards as reported in the Wall Street Journal, and 10,000,000 cards as reported in MSN’s red sheet, is incomparable.

And consumers and the government wonder why businesses don’t always come right out and tell everyone.

In the mix Visa is lowering their network acquirer processor fee from $0.0195 to $0.0155 per authorization. They are also adding a $.10 fee to some debit transactions that don’t meet certain processing criteria.

However, all businesses can expect to see the following changes.

For some businesses this may result in reduced fees but it’s likely that many businesses will see an increase in their monthly bill as a result of the FANF fee. MasterCard will be introducing new and similar fees as well starting in July. Stay tuned to see what those turn out to be.

I hate to say I told you so, but once again the Walmart’s and super retailers got their wish and the rest of the businesses out there end up with a higher cost. It’s unfortunate that organizations like the NRF don’t have the foresight to stop lobbying for super retailers at the expense of the businesses they supposedly represent. Thus far, the Walmart lawsuit a few years ago and the Durbin debit regulation have drastically increased the complexity and the costs to most merchants in the US.

An Overview

Some time back, the IRS decided that they wanted to see a report of all the money that a merchant processes through their merchant account over the year.

While this is a nearly useless number because as we all know, most businesses also accept cash, checks, and other currency, it will in theory catch the most egregious tax evading businesses. Basically, the few fractions of a percent of businesses that grossly cheat on their tax returns “could” get caught. Regardless of the absurdity of requiring the entire country disclose their processing volumes, here we are…

Now for this to work, your processor has to file a 1099 form with the IRS. This is a seemingly simple task. However, for this to actually work, your business information with your processor must exactly match what the IRS has on file. This includes business name, address, your tax id, etc. Things as simple as capitalized letters, a single space, and punctuation will cause a mismatch. You get a new tax id after opening up a merchant account. You signed your application with only your SSN and not your tax id number. Things like this will cause errors. Since it’s rare that merchants fill out their merchant applications with the exact same business information, with the exact same capitalization, and spaces as they do when they fill out their tax information, and nothing changes with their business-IRS relationship, it’s fair to say a lot of tax reporting information will not be valid.

So, what if the tax information is not valid?

So, here comes the nasty part. The IRS mandates that your processor will withhold 28% of all credit card payments until the errors are corrected. Yes, 28% of all of your credit card sales with be held until you fix whatever information is incorrect. And, even if you fix the problem, you wont get that 28% back until the end of the year.

More fees

Most likely you have or will receive notice that you are going to be charged for the work required to verify and prepare this massive undertaking. I’ve seen everything from several hundred $ per year, to a few $ per month. The reason you are being charged this fee is that it actually requires a lot of work to verify and prepare one of these documents for a merchant. Processors often have thousands, or tens of thousands of merchants, which translates into thousands of man hours in just the initial verification, not even taking into account contacting every merchant that has errors to obtain the correct information. If you didn’t authorize e-file for your 1099, your processor needs to mail you a physical form.

Exceptions

The exceptions to the filing requirements are:

1. a merchant’s total payment transactions for the year does not exceed $20,000, and
1. the total number of transactions does not exceed 200

In which case your processor will not need to file a report. This may consist of a good percentage of businesses out there, but most full-time businesses process more than $20,000 per year.

Conclusion

It’s unfortunate that the reporting regulation was ever passed. It’s a useless piece of legislation that creates a lot more work for small businesses and it’s unlikely that the reporting will catch any but the worst tax offenders. But, it’s passed and taking effect and there’s not much any of us can do about it at this point. No matter who you process credit cards with, keep a close eye on the mail and your processing statements for instructions on how to verify your information. My recommendation is to take it very seriously to avoid the 28% withholding.

The past month has brought monumental changes to the payment processing industry.

Mobile frenzy

Mobile payments seem to be on the fast track with just about every tech related company steaming ahead at trying to be the first with a workable and widely adopted mobile payment method. Even Google has jumped in, despite Paypal’s arguments, and hopes to be a major player in mobile payments. If the Google Checkout service is any indicator of Google’s success in mobile payments, they simply aren’t going to make it. However, with their success in the mobile android operating system, and their already massive relationship with businesses, Google may have a chance at something.

Debit Interchange Regulation

The biggest news of the month, is the regulation of debit interchange. After fierce battling for more than a year, debit interchange is to be regulated to $.21 per transaction and .05% per transaction. As written, this applies to all debit card transactions, PIN or signature as well as Ecommerce/MOTO transactions. It’s not entirely clear when and how this will take effect but stay tuned over the next months.

The biggest winners in this regulation are once again the super retailers who process millions of transactions per year. Small and medium size merchants can expect savings, but it will not likely be anything as monumental as the Walmart’s and Amazon.com’s out there. There’s going to be a lot of misinformation flying and aggressive marketing over the next year as many processors will take advantage of the turmoil, misinformation, and instability in the merchant account industry. I would strongly suggest exercising caution in anyone making sensational claims about lowering your rates. Major industry changes offer the greatest opportunity to get scammed into a bad merchant account. Just remember that almost every processor has roughly the same hard costs, so if they are unrealistically lowering fees in one place, they have to make them up somewhere else.

Expect major checking account changes

As a result of banks losing roughly 50% of their revenue from debit cards, we should all expect drastic changes to our personal and business checking accounts over the next year. I know that all of my business and personal debit rewards have been canceled over the past 3 months. I think that debit rewards are the tip of the iceberg, and we should expect changes in debit and checking account fees and overall debit availability over the coming months. Some smaller banks have rumored that they will be dropping debit cards completely, so it will be interesting to see where this all ends up a year from now.

It’s a mute point to argue my position on the interchange regulation at this time. Retailers may be chocking this up as a victory, but don’t start celebrating yet. This regulation may seem like a small amount. Personally I think this regulation will change the way we do banking in the US, and could very well effect the entire retail economy, not necessarily in a good way. The next few years will give us a better picture of what these regulation have done to the retail industries and checking accounts.

This is in response to the $.12 debit card interchange regulation battle that is waging between banks and retailers. I will refrain from commenting on the debit card regulation at this point. I’ve made my views and concerns known to the federal reserve board. What I will end with is that the entire debit and credit regulation concept is far more complicated that many would like to believe. It cannot be simply capped without major repercussions perhaps large enough to hurt the entire US and world economies. Something as important as this should not be attached to major bills and should be voted on separately as this specific regulation was not.

Verifone just acquired Hypercom corporation. This effectively removes all legitimate competition from the US credit card terminal market. Verifone’s own products have suffered a decline in reliability and quality starting 5 or 6 years ago, so naturally Verifone began purchasing competitors. They started with wireless leader Lipman, and then acquired Way Systems, and now have taken down the last barrier, Hypercom. Verifone stated that this acquisition was to expand their presence in the European market, but make no mistake it removed their last competition from the US market completely.

I don’t want to forget Ingenico whom is one of the worlds largest terminal manufacturers, however they are a mere drop in the bucket in the US and sell almost exclusively to large chains and direct placement deals that normal mom and pop merchants will never see.

I’m personally appalled that the government allowed this transaction to take place. On the bright side, if Verifone cannot produce a higher quality product, there’s several smaller manufacturers that are already gaining serious ground, most notably Dejavoo, ready to replace Hypercom. This will provide the perfect avenue for Dejavoo and others to become much larger terminal brands (until Verifone purchases them of course). Dejavoo’s product is far superior to Verifone or Hypercom and is cheaper than either.

I’m seriously holding back words on writing this. The impact of this on the credit card terminal industry would be comparable to Walmart purchasing Target or Microsoft purchasing Apple. This sort of acquisition is the reason that anti-trust laws exist. It’s unfortunate that the government’s priorities are so far removed from the B2B industries of the country.

I read a great article about Durbin’s amendment in which I found out that free checking accounts were virtually non-existent before the invention of signature (or offline) debit. Signature debit is where a merchant processes a debit card like a credit card without requiring a PIN number. With the invention of signature debit, banks had a steady source of income from debit interchange that was directly attached to their customer’s bank accounts. With this additional income, came the invention of the free checking account. Right now most consumers and small businesses use free checking accounts, which are partially subsidized by fees the bank receives from signature debit interchange. These fees also help pay for chargeback investigations, and help pay for account features that you would have had to pay for before there were free checking accounts.

Now that congress is capping debit interchange, we can expect changes with regard to free checking account practices. Since these accounts can no longer be subsidized by signature debit interchange, banks are going to have create monthly fees for checking accounts. Chargeback investigations also cost banks huge amounts, so we can expect further fees will be charged to cover the additional costs for these. Right now, BOFA and others have announced that they plan on charging fees for checking accounts once the new regulations go into effect. Goodbye, free checking…

What I think is the biggest flaw to the debit regulation, and of much greater significance in the overall picture, is the double standard that congress has proposed. The law limits the amount banks can charge for debit interchange. At the same time, it exempts financial institutions with less than $10B in assets in attempt to help these smaller institutions out, but at the same time allows merchant to discriminate against types of payment at their discretion. A thoughtful move, but because of the second part it will have a near 100% opposite effect than planned.

Merchants will now inherently be more inclined to, and be allowed to, accept debit cards with the lower rates, which will be the big bank’s cards! Instead of helping credit unions and small banks, congress instead created the perfect avenue to put them out of the debit card picture. While it’s unrealistic to assume that the smaller banks will not be issuing debit cards at all, it is completely reasonable to assume that retailers (especially the large ones) will favor and may only accept cards from large banks that they pay less for. We’ll start seeing signs like only Bank of America debit cards are accepted here, and congress not only made it completely legal for merchants to do this, but they created the system to facilitate it!

With one swipe the future shows the end of free checking accounts, and the end of credit union’s issuing their own debit cards.

I’ll readily admit that I am partial when it comes to regulation of my industry, but how could congress have created something so blatantly damaging to credit unions and small banks in the US. As soon as the credit unions learned about the details of the rules , they began lobbying. However, the wording and details were published after the rules were passed, so to stop it now is more a prayer than anything else. It doesn’t take an expert to know that large retailers follow the savings, just like consumers…

More than any resource I’ve seen before it, this paper gives a clear and easy to understand description of the current state of electronic crime.

Merchants do not have protection from liabilities if they take the steps to become compliant!

Now before QSA’s light their torches, let me just say that I completely understand and agree that PCI Compliance ≠ Security. Nevertheless, from a business perspective it’s hard to take a program like this seriously when there is no real benefit from becoming compliant. One can always argue that security is a benefit, but in reality it’s not unless you actually prevent a data loss with it, and there’s no measurable monetary benefit of something that you don’t know was prevented.

I do have a strong belief, which I think is further illustrated by the slow adoption rates of level 3 and level 4 merchants, that most merchants don’t take PCI seriously. Losing customer data is nothing to be joking about, but they way PCI has been implemented with liability dumped on merchants and processors, and the fact that compliant businesses get no protection over non-compliant ones, is laughable. Independent of the PCI Council which they helped start, MasterCard now requires security scans for all merchants even if they don’t process on the Internet or over an IP connection. How can PCI possibly be taken seriously if the founding companies create independent standards after they start an organization specifically to make sure they all have the same standards?

So what’s the big news?

Washington state just passed a law (HB 1149 ^pdf) that effectively legitimizes PCI, or at least legitimizes much of the cost in becoming compliant. What this law will do is grant a merchant safe harbor from liabilities resulting from a data breach, provided that the merchant was PCI compliant when the breach occurred. It also states that the breached organization’s compliance cannot be revoked as a result of a breach. Basically, if you were compliant at the time of the breach, you are still compliant after the breach. This sort of retroactive revocation of PCI compliance has occurred in several major breaches. From my observation, this law is the first breath of reason that I have seen pushed towards PCI compliance.

Business owners (at least in Washington) can look at PCI and assume, if we become secure and become PCI compliant, we’re no longer as-liable if some extraordinary circumstance results in us losing data. The proactive response is: let’s get this taken care of, lets make sure that our data is secure, and let’s get compliant!

Currently that same business owner is checking [YES] to all the boxes and emailing in their questionnaire. They’re asking, so it doesn’t matter if I’m PCI compliant, I’m still fully liable for any costs and damages if someone steals my data? Hmm… [YES] to all… DONE!

The pitfalls

With legislation like this there are pitfalls, and probably some big ones.

First off, the law states that merchants must be validated compliant within 1 year of the breach occurring. 1 year is far too long for a business that was compliant to be assumed to be still compliant. Additionally, this doesn’t address the fact that the business could quite easily take steps to actually become secure, but intentionally remove them for operations sake once they pass a security scan or self assessment.

Second, the law is only for Washington which makes it worthless in all practicality. However, the fact that one state is passing it may push Visa/MC/AMex/Disc to look at adding real protection to PCI.

Third, the law doesn’t address actual costs to consumers such as fees from bounced checks or other bank and credit associated fees. Merchant’s would most likely still be liable for many of these fees (assuming that there are some) if they suffered a breach.

Lastly, the law would justify costs for becoming compliant, but could put huge costs on someone else (and it’s unclear who). If the merchant does suffer a sizable breach, it’s clear that there are real costs in re-issuing cards. What’s not clear is who would end up paying for them if this law is passed.

Meaningless?

Until this law is adopted by the issuers or put into effect on a national level, the benefits from it on a widespread scale, are going to be little to none. I’m openly against government regulation in any industry, yours or mine, so I do hope that card issuers and PCI security council take a serious look into adopting similar measures directly into PCI. I think that providing some sort of protection like this would greatly legitimize PCI especially in the minds of the business owners that are forced to become compliant and feel that PCI does not give them any benefit. It’s time for PCI to give small business owners a real reason to become secure and to become PCI compliant. A measure like this law is that reason!