In this holiday month the PCI Data Security Council has taken the opportunity to update guidelines for merchants using Wireless technology to collect payments and also to issue guidelines for the growing number of merchants employing Tokenization.

The Payment Card Industry – Data Security Standards (PCI-DSS) lay down minimum security requirements for all merchants and aim to reduce the level of data breaches where customer card details are stolen. Failure to comply with these standards or incidents leading to data loss can lead to substantial fines and brand damage.
The guidelines are designed to help merchants to interpret the PCI-DSS standards, so are not prescriptive and do not change the Standards. Each merchant must ensure that their individual operation complies with the PCI-DSS standards.

Please click for links to the Wireless and Tokenization guidelines or the PCI Security Standards Council website, where you will find guidance, Self-Assessment Questionnaires, lists of qualified Assessors and other valuable information.

Britain’s banks have u-turned and scrapped plans to consign cheques to the history-books.

In late 2009 members of the Payments Council voted to set a provisional target of 2018 for the abolition of cheques – which have seen declining popularity in recent years – with a review scheduled for 2016.

However, the decision provoked widespread concern and in April parliament’s Treasury select committee reopened its probe into the plans, claiming it had been “inundated with letters”.

The council has now cancelled its plans, promising that “cheques will continue for as long as customers need them”.

Richard North, chairman, Payments Council, says: “It’s in the DNA of the Payments Council to consult and listen to all those people who actually make payments and use cheques. Listening to over 600 stakeholder groups, working with the banks and following our appearance before the Treasury Select Committee, we have concluded we should reassure customers that the cheque is staying.”

North adds: “We will use what we’ve learnt to keep improving existing systems, as well as introducing innovation, so that customers benefit from 21st century ways to pay. Innovation must be at the heart of what we do.”

The Cheque Guarantee Card Scheme that was killed off last month will not be revived.

Having seen Chip & Pin widely accepted by cardholders and retailers for face-to-face transactions, the card industry has turned its attention to cutting identity fraud where the retailer and cardholder don’t meet.

And after a few years of a softly-softly “carrot” approach, the “stick” has appeared in terms of increased – and avoidable – transaction costs and penalties where businesses do not comply with the common standards for cardholder not present (CNP) transactions through mailorder, by telephone or via the internet.

It is very unusual for us to find that retailers are not now capturing the 3-digit signature strip code in all CNP transactions, but it is common to find a belief that it is adequate for web transactions. While it is a useful tool for reducing the potential for fraud when transactions are through the internet, cost savings flow from 3D Secure being in place. (3D Secure is the catch-all namefor systems such as Verified by Visa or Mastercard Secure Code).

Even where 3D Secure is available, it is often not functioning and penalties run on average at 0.5% of credit card transaction values and 10p per debit card transaction. Every single penny of that penalty is avoidable.

The other primary area of avoidable costs is to ensure that cardholder data is handled in compliance with Payment Card Industry Data Security Standards (PCI-DSS), and, when systems are compliant, to ensure that the merchant acquirer is aware. Penalties can be as high as 0.85% of all transaction values and the solution can be as easy as filling in a form for smaller retailers with only face-to-face transactions.

It is more complex for larger retailers and those who transact through mail-order, telephone or the internet but I believe that it will not be long before the non-compliant have their ability to accept card payments revoked.

The downward trend is attributed to fraud fighting initiatives, Chip & Pin cards, and – crucially – increased awareness among retailers and consumers of secure identity measures like CV2 (the 3 digit signature strip number) and 3D Secure (the password process known as “Verified by Visa” or “MasterCard SecureCode” and which is increasingly common during web transactions).

Online banking fraud losses totalled £46.7 million in 2010 – a 22% fall on the 2009 figure – as banks installed sophisticated fraud detection software and more consumers equipped their PCs with up-to-date anti-virus protection. The dip in online fraud has occurred despite a continuing rise in phishing attacks, up 21% from 2009.

Phone banking fraud losses totalled £12.7 million during 2010, an increase of five per cent from 2009. Most losses involve customers simply being tricked into disclosing their personal security details – through cold calling or fake e-mails, says Financial Fraud Action UK.

Stephen Whitlam, a banking specialist with Expense Reduction Analysts says “Over the last couple of years we have stressed to retail clients the importance of basic protections like CV2 when accepting mail/telephone card transactions  and 3D Secure for internet sales. We expect them to see the benefit overtly in reduced processing costs, but it is clear that reduced fraud losses are also a major incentive. I certainly anticipate that the Card Industry will mandate these processes uniformly shortly”.

Consumer Price Inflation rose to 3.3 percent last month from October’s 3.2 percent, marking the 11th consecutive month it has been at least one percentage point above the Bank’s 2 percent target.

Sterling rose and gilts fell as the data reinforced expectations the Bank would raise interest rates before the end of 2011.

Inflation looks set to rise even higher at the start of next year when VAT rises to 20 percent from 17.5 percent and utility providers put up tariffs.

Although wage inflation has so far remained low, policymakers are concerned that a prolonged period of above-target inflation could lead to a wage-price spiral..

“The Monetary Policy Committee is unlikely to respond to this surprise,” said Barclays Capital economist Fabio Fois. “The committee has nailed its colours to the mast: it views the current high rate of inflation as temporary.”

“The MPC is putting its credibility on the line,” said Barclay’s Fois. “If inflation rises further, as we expect, the situation is set to become even more uncomfortable.”

The competition watchdog has been probing the possible mis-selling of Payment Protection Insurance (PPI) which typically covers a purchase in case the buyer of a product becomes sick or unemployed.

The watchdog has estimated that customers were being overcharged by over £1.4 billion a year from the sale of PPI, and revenues from the sales have plunged since regulators stepped up scrutiny on sales practices.

The UK’s five biggest retail banks could have to pay over £5 billion to compensate customers under a worst-case scenario for them, analysts at Morgan Stanley said on Wednesday.

In August the Financial Services Authority introduced proposals for banks to handle PPI complaints and redress customers fairly where appropriate. The British Bankers’ Association this month brought a judicial review of whether the FSA can apply new standards to old sales.

There are an estimated 12 million outstanding PPI policies, and Lloyds for example could suffer a £1.5 billion hit, Morgan Stanley reported.

The Basel Committee (representing 27 countries) had already agreed to a phase-in for its ‘net stable funding ratio’, which covers a bank’s longer-term liquidity which will be trialled from 2012 and become mandatory in 2018.

On Tuesday the committee said it would also adopt a gradual phase-in for its ‘liquidity coverage ratio’ (LCR), which will require a bank to hold enough highly liquid assets to cover 30 days of net cash outflows.

Britain’s Financial Services Authority has already proposed its own set of liquidity rules and now will come under pressure to align their introduction with the delayed Basel timetable to avoid any market distortions.

The liquidity rules are part of a wider Basel III package which G20 leaders are set to endorse in Seoul next month.

There is widespread evidence that most of the major merchant acquirers are imposing – or trying to impose – price increases across great swathes of their customer bases. The reasons given to justify the hikes are real enough, with the acquirers facing external cost increases that I will discuss below, but Expense Reduction Analysts banking Team commonly find:-

i.            That the new tariffs often represent more than cost increases being passed on, with acquirers – and I am being diplomatic here – putting a “spin” on their explanation that disguises increases in their margin.

ii.            Increases apparently imposed without any specific notice at all, with claims that “a standard letter was issued” or the increase was detailed in a statement message. (Who, in a position of authority in any business of any scale reads statement messages from acquirers?)

iii.            Justifications alluding to cost increases that occurred before a particular tariff was agreed.

I mentioned that the reasons for the increases are real enough. In a bit more detail these include:-

1. The two major card branding schemes (Visa and MasterCard) are both increasing the underlying cost to acquirers of secure mail-order/telephony transactions. The scale of these increases is staggering and varies between 44% and 69%. This level of imposed increase represents a step change in the acquirer’s costs of these transactions and in many cases mean that they would be facing losses on them. The increases kick in next Spring but – in the scheme of things – one can understand pricing impacts for businesses being negotiated or advised right now.
2. Many credit card issuers are upgrading standard accounts to premium accounts (such as MasterCard World) at renewal. Acquirers face a significantly higher interchange cost from the schemes for processing these types of card. Tariffs often incorporate a single fixed price for “credit cards” and – given the increasing proportion of premium account holders within the transaction mix – acquirers will at best be facing diminishing margins unless they adjust.
3. Some acquirers have very sophisticated back office systems which allow them to differentiate between secure and none-secure cardholder not present transactions (where “secure” means correct application of either 3-digit signature strip protection for mail-order/telephony or the password-based 3D Secure system for e-commerce transactions). Some cannot differentiate. The penalty costs faced by the acquirers (for non-compliant transactions processed by their merchants) are hefty and increasing.

So, in our projects what do we do about these increases if they are “justified”? After all I do concede that underlying pressure on acquirers is being caused by external elements and they could even be facing potentially unsustainable losses on some transactions.

-          The first part of the answer – at its simplest – is to ensure that the reasons given are actually justified. Negotiated tariffs/margins are negotiated tariffs/margins in my book and cost features in existence at the time of (or prior to) negotiations cannot be used to justify subsequent unit price increases. And because, whether we like it or not, card acquiring is a numbers game, mistakes like that do creep in. I ought to add here, in the interests of fairness to the professionals I deal with in the acquirers, instances like this are swiftly apologised for and corrected.

-          Secondly it’s about making sure that the impact of the increases is limited to no more than passing on the cost changes that the acquirers themselves face. I cannot add an “in fairness” comment here because my experience is that a rise in external costs is often used to mask margin increases. That is the case now in many of the standard tariff increase letters that I have seen and that I am robustly challenging.

-          Thirdly, if an increase is unjustified and – really critically – results in a client facing tariffs that become uncompetitive, we will recommend the activity is tendered. Card acquiring remains a very competitive industry and whilst that should be a last resort, it is actually often straightforward.

The above actions really do rely upon detailed analysis, modelling and current market knowledge both to assess their potential value, but also crucially, to negotiate the optimum outcome. For example I mentioned a rise of 44% to 69% in acquirers’ own major external costs for transactions processed via mail order or telephone. This does not mean a 44% to 69% increase in retailer’s tariffs is justified as that is precisely the way that margins are unfairly increased at times like these. Our aim is to ensure that the actual cost….and no more….is passed on.

Virtually every business that accepts cards will already have received – or will receive over the next few months – an increase in their card processing costs….whether advised or unadvised. And if they don’t, I would suggest that they are already paying too much as otherwise it is hard to see how the acquirer can absorb their “hit” without comment!

This author has long-blogged and written articles stressing the importance that the card industry places on security measures. Their success now seems apparent as according to the UK Cards Association, total fraud losses on UK cards in the first half of 2010 were £187 million, some 20% better than the same period last year. I find it staggering that against the backdrop of the explosive increase in the use of cards – and in the throes of recovery from a recession, this is the  the lowest figure for 10 years!
The association, which represents all the country’s major card issuers and acquiring banks, claims the fall is down to several industry initiatives, including the increasing roll-out of updated chip cards and ongoing work with retailers to improve the security of their equipment and procedures.

Other factors include greater sign-up to MasterCard SecureCode and Verified by Visa, increased use of fraud detection tools by banks and retailers and the growing roll-out of chip and PIN abroad.

Card-not-present fraud fell 12% to £118 million and – as this fall bears out the effectiveness of security measures – expect greater emphasis on this aspect as it is still the biggest element.

In Expense Reduction Analysts’ Banking Team we are hearing whispers from various sources that both Visa and MasterCard are likely to increase the underlying cost of Mail Order and Telephone based card transactions next Spring – and also maintain or even increase the extra cost for non-secure transactions. So – because the medicine is working we anticipate more of it!

We expect that tariffs will continue to put a significant premium on riskier transactions; a classic “stick” approach. And because we monitor the underlying supply-side costs the acquirers face from the major issuing brands (Visa and MasterCard primarily), we can negotiate fair price points for our client’s transactions. Moreover, we can advise on or project manage clients through to compliance and help drive out the penalties.