Choose Your Retail Threats Carefully

Opinion: Credit card companies ponder the carrot-and-stick argument as the deadline for retailers to comply with credit card security rules approaches.

As the big Sept. 30 deadline for retailers to comply with credit card security rules, Visa and others ponder the carrot-and-stick argument.

The most thankless job in corporate America today is the middle manager who is instructed to enforce a policy, but is given no real power nor the resources to do it.

That manager cant fire anyone, nor can he/she significantly influence anyones raise or bonus. In short, the manager has few tools other than begging, pleading and other low-cost persuasion tactics. The hypothetical fact that the policy being enforced is good for the employees and the company wont help much.

Sometimes, that manager will threaten to cut off some valuable resource to the people hes trying to persuade. As the self-selected deadline approaches, that manager gets very nervous. What if the action is seen as overly punitive and it ends up undermining the middle managers influence, thereby condemning him to failure? Just because he cant fire doesnt mean he cant get fired.

Im using that sad hypothetical tale to point out that were in the middle of two very interesting deadlines set by Visa in connection with the PCI (Payment Card Industry) council, the group that is trying to enforce industry standards on retail credit card security procedures.

A few days ago—July 31—was the deadline for some 6 million of the nations smallest retailers to report whether theyre compliant with PCI standards. Its an interesting group called Level 4.

Although its the group that includes the smallest merchants in the United States, many of them are not that small. It could include a retailer that makes 999,999 Visa transactions a year, including as many as 19,999 e-commerce transactions. So its important to remember that this group isnt solely mom-and-pop hardware stores and Olivers Bait Shop.

Although those retailers represent only about one-third of all of the Visa transactions, they account for some 80 percent of that credit cards data breaches. Suffice it to say, Visa officials are expecting the compliance numbers to be quite low.

This is low even though those retailers have the option of doing self-audits. Let that sink in a moment. Isnt there something inherently contradictory about a self-audit? This isnt putting the foxes in charge of the henhouse. This is the farmer telling Chief Hen Protector Fox, "We just accepted a huge load of chickens. I have no idea how many we have. In the morning, report to me how many there are. I trust you."

Oddly enough, the main complaint about self-audits isnt an honesty issue. Its an ignorance issue, with some complaining that those filling out the self-audits rarely understand the full intent of the questions. In several weeks, Visa should have the latest stats on how compliant those six million retailers think they are.

The more interesting imminent PCI deadline is on Sept. 30 and its when Visa has been threatening to start fining non-compliant Level 1 retailers, albeit indirectly. (You didnt think I was ever going to get to the anecdotal lead of this column, didnt you? Ye have little faith.)

/zimages/5/28571.gifClick here for more on Visas relationship with retailers.

Officially, Visa will charge penalties to credit card acquirers, who will have the option of passing those fines along to the retailers whose non-compliance prompted the fine. Those fines from Visa will max out at about $25,000 per month. Retailers have little to worry about as long as they believe in the generosity and charity of executives working for major banks. Yeah, not an especially likely scenario.

Sept. 30 is for Level 1. Level 2 retailers have until the end of the year to sweat. Visa has also offered a bribe alternative, with lower credit card costs (lower interchange rates) for those who become and stay compliant.

Between the two programs, the carrot incentives are likely to work a lot more effectively than the stick fines. Why? First, the math clearly shows a much more persuasive financial impact for those major retailers saving those pennies off of every transaction. Secondly, the threats are likely to alienate the very retailers whose cooperation is needed. P>The kind of fines were talking about are likely to cost these Level 1 retailers a lot less than paying for the security investments to make themselves compliant. Visa and the PCI Council are refusing to publicly identify the delinquent retailers, for good reason, so if they can stomach the fines, it could be the more cost-effective route to take.

Retail Center Editor Evan Schuman has tracked high-tech issues since 1987, has been opinionated long before that and doesnt plan to stop any time soon. He can be reached at

To read earlier retail technology opinion columns from Evan Schuman, please click here.

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