A Merchant Processing Score: The Anti-PCI

Written by Todd L. Michaud
April 21st, 2010

Franchisee Columnist Todd Michaud has spent the last 16 years trying to fight IT issues, with the last six years focused on franchisee IT issues. He is currently responsible for IT at Focus Brands (Cinnabon, Carvel, Schlotzsky’s and Moe’s Southwestern Grill).

What if we turned PCI compliance on its head and reversed the thinking?

Consider this scenario: You’re nervous. It’s the last day of a month-long assessment done by your Acquirer. They have had a team of IT forensics people booked in a conference room at your offices for the last 30 days, tearing apart your IT environment. They have been validating firewall rules, reviewing log files and inspecting virus protection updates, among other things.

The Acquirer is now about to deliver a Merchant Processing Score (MPS). The result is a big deal; that MPS will determine the rate you pay for your credit card fees for the next 12 months. A higher score and your rates go down; a lower score and your rates go up. This score could easily mean a million dollar swing in profitability next year. Everyone’s fingers are crossed that you did well with the penetration test.

Although clearly made up, I wonder if situations like this could become reality. They would, if we reversed the thinking behind PCI compliance. For example, instead of handing out fines for failure to meet the standards and then merely using a PCI failure as an excuse to deny a chain a preferred interchange rate, what if discounts were handed out for those merchants who implement solid data security systems?

It is a somewhat simple concept: The amount of fees paid by a merchant to process a credit card transaction is directly related to how secure its environment is. A standard scorecard is created for each merchant’s “risk factors,” similar to a credit score:

  • You have implemented tokenization? +10 points
  • You have a Chief Security Officer? +5 points.
  • You haven’t had a breach in 1,000,000 transactions? +8 points.
  • You passed a full-scale white-hat penetration test with no issues? +15 points.
  • First-time merchant? -10 points.
  • Wireless access points installed in the retail location? -8 points.
  • No software maintenance contract for POS? -5 points.

After an audit is completed, a score would be assigned. The rate a merchant pays for interchange is based upon that score. The higher the score, the lower the fees. And I’m not talking about a PCI-like assessment. I’m talking a full geek-on-geek audit. Evidence that a policy exists would earn you zero points. Evidence that a secure policy exists and has been implemented and that all employees are continuously trained on security procedures and protocols would earn points.

The current mortgage company underwriting process seems like a good place to start building the audit framework. Having been through this process recently, all I can say is that I would rather be working on PCI compliance! And just like a mortgage underwriting process, if you score too low, you don’t get to process credit cards. Too bad; so sad. Here’s a quarter. Call someone who cares.

Why is this scenario better than the current approach? PCI compliance sets a standard that all retailers must meet. But these standards create somewhat of a conflict of interest. The retailer is incented to do the minimum to meet the requirements, which may be at the expense of becoming secure.


5 Comments | Read A Merchant Processing Score: The Anti-PCI

  1. Tom Mahoney Says:

    An interesting concept that sounds like it has some merit for the big guys in Level 1 and 2 but what about the Level 3 and 4 merchants, especially those that are eligible for the shorter SAQ?

    As theDirector of Merchant911, I represent over 4,000 on-line merchants, at least 70% of which fall into the Level 3 and 4 categories. I doubt that these merchants will see any ROI in going above and beyond. In fact, I don’t think they have much wiggle room to get much better than what’s required. You’re certainly not going to get them to agree to a full security audit when most of them are complaining about a $99 scanning fee.

    My fear is that these mom and pops would end up paying higher fees to make up the lost revenue from the millions of transactions those big guys would get at reduced rates.

    Tom Mahoney, Director
    Merchant911, LLC

  2. Todd Michaud Says:

    I understand completely, as I deal with 1,000’s of small business owners (our franchisees) every day. But let me ask a question, why shouldn’t those merchants who put are putting credit card numbers at risk pay more than those who do not?

    The fact that the smaller merchants cannot justify the costs associated with good security is not an excuse for it not to be done. I am of the opinion that if you want to take credit cards (decision), then you need to pay all the costs associated with that decision, including the costs to appropriately secure the information.

    The merchant can either stop accepting credit cards, raise their prices, or eat the additional costs. With today’s PCI, there is no incentive to go above and beyond. With this scenario, they would see reduced fees and potentially see a competitive advantage when their score is higher than their competition.

  3. Howard Says:

    Although the concept sounds tempting, it just won’t work. Main reason is that PCI is a business more than a watch dog or traffic cop. Merchants that don’t comply are being charged an additional fee above a fee for the PCI compliance program. The guy that is going to get hurt is the guy that still uses a dial terminal face to face, picking up the cost for all the other types of processing merchants. You can’t control the interchange or discount because the card brands are now upping the cost of a transaction and banks need to recover income lost from everywhere else. Interchange changes regularly to increase revenue at the issuing level. PCI and the banks and the card brands have no connection to each other when it comes to pricing, and each has their own greed factor.

  4. Theo Says:

    Interesting concept. The major flaw I see is it opens up the assessment process to even more ‘negotiation’ than it already does. Assessment companies would be marketing “I can reduce your transaction fees by X% if you use us as your assessor”, they would be sharing in the savings, etc.

  5. Cranston Snoard Says:

    “Why is this scenario better than the current approach? PCI compliance sets a standard that all retailers must meet. But these standards create somewhat of a conflict of interest. The retailer is incented to do the minimum to meet the requirements, which may be at the expense of becoming secure.”

    All standards and requirements are by definition a MINIMUM attainment. Anyone who claims to write standards and doesn;t understand this fact should resign immediately.

    So let’s put the onus where it properly belongs with this — on the PCI SSC and those who wrote the requirements.

    If PCI SSC sets a requirement and then is unhappy that no one is going beyond that requirement, they should re-cconsider the particular requirement. But they’d best do so very carefully. PCI DSS is a CONTRACTUAL obligation; if PCI SSC insists I have to demonstrate that I am doing more than the required minimum, even the most minuscule action beyond the defined requirements would qualify. If they want companies to do specific activities to show they are exceeding a certain requirement, then change the requirement to be that level.

    If PCI demands that a merchan do X, and the merchant does X, then PCI has no one but itself to blame when the merchant doesn’t do X-plus-a-bunch-more. If PCI wants X+ instead of X, then say so specifically and change the requirement — otherwise any first year law student would have a field day in court with them.


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