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The Green Sheet Online Edition

August 27, 2012 • Issue 12:08:02

Countdown toTIN deadline: Are you ready?

By Jacob Young

Less than five months remain for acquirers to completely validate their merchant portfolio tax identification numbers (TINs) and legal business names with the Internal Revenue Service.

Virtually all acquirers I've spoken with are acquainted with TIN requirements and wary of the 28 percent withholding rate that penalizes merchants with mismatched or incorrect TINs. Despite industry awareness, multiple remaining concerns may develop into an industrywide hailstorm as the deadline approaches.

Assessing the industry

I believe the industry thinks it's prepared. Yet some acquirers are ignoring critical facts about their own TIN-matching progress. At the 2012 Electronic Transactions Association Annual Meeting and Expo, many acquirers remarked that they still would not be ready for the Jan. 1, 2013, penalty deadline, even after an extension of the 2012 deadline. Some acquirers disclosed they do not believe their current in-house TIN programs will meet their business needs.

As I contemplate industry progress over the past year, I reluctantly agree. Compared with 2011 TIN matching data, the average portfolio has reduced mismatched TINs by only 10 to 15 percent. At this rate, if 20 to 25 percent of an acquirer's portfolio is still mismatched in August, gathering and validating the remaining TINs in five months will be nearly impossible without a drastic program change.

Spotting trends

Three main trends are prevalent in the average acquirer's IRS TIN validation process across the United States:

  1. A significant number (20 to 30 percent) of mismatched merchants remain among midsize to large legacy portfolios. In contrast, smaller acquirers have matched roughly 90 to 95 percent of their portfolios' TINs, possibly because of personalized and cultivated merchant/acquirer relationships.

  2. In-house acquirer TIN programs are failing. Many acquirers developed in-house solutions to tackle the TIN-matching mandate last year, but they are slowly discovering their programs cannot succeed by the deadline. Some are proactively searching for alternate solutions to implement before the end of the year. A majority will not realize until late September or October that their solutions will not give them the results they need and will scramble for quick fixes.

  3. Hard-to-reach merchants remain problematic. Although most acquirers have reached the IRS' minimum "good-faith effort" to contact all merchants about TIN requirements at least three times, acquirers want to steer clear of possible attrition following the 28 percent withholding penalty rate.

Generating responses

Acquirers may be unable to elicit the desired merchant response because they don't have the correct tools. Merchants tend to be unresponsive when it comes to reporting for any type of mandatory compliance. It takes multiple solicitations to get a response, which may come from setting an arbitrary due date or issuing a bank policy.

Typical acquirer-to-merchant communication includes direct mail or a statement message. Typical merchant fluctuation or a change in phone number, fax, or email may make communication difficult for acquirers that don't devote resources to obtaining extra contact information.

Acquirers need alternative techniques to help these merchants respond. For example, an unresponsive merchant, traveling business owner, or manager who doesn't visit his or her store very often may never receive or respond to direct mail communication. Alternative methods of communication such as fax, email and phone help acquirers connect with merchant outliers. It helps to have a skilled team of verification researchers search for and update all contact information to ensure acquirer communications will not be lost or neglected.

Revalidating every year

An estimated 30 percent of merchants require revalidation every year, based on merchant churn between processors, name changes or changes in ownership. Such activities contribute to the inaccurate, incorrect, mismatched or missing TINs among acquiring banks. However, a large portion of the 30 percent is the churn of merchants switching processors.

Acquirers industrywide have expressed concern about the churn from attrition. Currently, when acquirers board new merchants, they can't immediately validate gathered merchant information against IRS records. The IRS takes a minimum of 48 hours to get back with answers. That two-day lapse, in addition to follow-up communications to merchants, presents a problem for acquirers wishing to land such accounts as quickly as possible while gathering correct information.

Grabbing churn by the horns

One solution is to use underwriting tools designed to instantly validate TINs as acquirers board or submit changes to merchant accounts. Using an on-the-spot TIN tool rids a portfolio of most of the 30 percent yearly churn, leaving the unavoidable 5 to 10 percent of merchants who change from limited liability companies to corporations, change their names, acquire other companies, issue stock to new investors or change business ownership. Many acquirers are looking to on-the-spot TIN-matching tools to help them trickle in the rest of their merchant portfolios.

Acquirers and ISOs have a sustained responsibility to obtain correct TIN information and legal business names for each merchant. My TIN advice? Start now and stay on top of it. end of article

Jacob Young, "The TIN Man," is Director of Business Development at SecurityMetrics, a compliance and merchant data security solutions company designed to help both merchants and acquirers decrease their liability while increasing security. Jacob can be reached at jyoung@securitymetrics or 801-995-6340.

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