U.S. Retailers Should Watch Visa’s TIP
Written by Walter ConwayA 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 wconway@403labs.com.
-Marc
February 17th, 2011 at 7:18 am
Sounds good (we’re UK based) however our store cards (and a lot of fashion/department stores in the UK have that concept) aren’t Chip and PIN so it’s unlikely we’ll qualify.
February 17th, 2011 at 11:59 am
The problem has always been the cost never the implementation. There is no incentive for a merchant to change and banks to re-issue cards, especially when they have just done so because of the credit card laws put into place last year. If the US is forced to move in this direction then who will be paying for the upgrade and are there any monitary benefits to do so. The merchants will need to update all their terminals which the mfg’s will make sure the price is higher than normal during this time. The devices of course will need to pass PCI. Once this is all done you would think that Interchange would go down since the issuer is less susceptable to fraud, but I wouldn’t bet on it.
It’s all about the money.
February 18th, 2011 at 3:28 am
Thanks for the great comments.
@Mark: You raise a very interesting point I had never considered: what about private label or store cards (or even stored value cards)? Are they in the mix, or is the 75 rule only that percent of Visa cards? I wish I knew.
@Software Developer: Yes, it is indeed all about the money, and I hope that is not a surprise to anyone. While I am less skeptical than you are (my positive nature, I guess), I agree that it appears any compliance burden will fall on the merchant so your focus should be to minimize your PCI scope and not store any cardholder data. Then this becomes a side show.
Now – when will we all start talking about security instead of compliance?
February 18th, 2011 at 9:07 am
Walt asked: “Now – when will we all start talking about security instead of compliance?” It’s scheduled for April 1, which is when we all get to say that true security is the goal of the card brands.
February 18th, 2011 at 7:24 pm
Walt, your analysis is spot on. With this announcement I really don’t see any real benefit to merchants. It all sounds good, but at the end of the day merchants won’t see any real savings. As you point out, until the other card payment networks adopt the same policy, merchants will still have to go through the exercise and expense of re-validating their PCI compliance each year regardless of Visa’s new requirements. Why Visa chose to go this route alone and not through the PCI Security Council as an industry wide rule so all the other networks would be on board is an interesting question??
March 8th, 2011 at 5:02 am
I think the TIP just put acquirer into an embrassing position. If an acquirer told the merchant to stop the re-validation of PCI compliance, once non-compliance cases happened, all lost will be suffered by acquirer at the 1st moment. I didn’t see being an acquirer will allow merchants working in the card industry without any compliance proof.
March 13th, 2011 at 3:01 pm
Walt says: “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.”
Regardless of the outcome with TIP, many experts do advise those currently planning a POS refresh to invest in a device that has an EMV or chip-and-pin reader built in because mandates might come “sooner rather than later” saving retailers a lot of money down the road.