he payments industry had quite a summer. Following a Federal Reserve Bank of Kansas City conference in May that addressed the issue of interchange, merchants filed two lawsuits against the card Associations concerning these fees.

In addition, a major data security breach discovered in June at CardSystems Solutions Inc. compromised the security of up to 40 million credit card accounts. As a result of the breach, Visa U.S.A. announced that by the end of October, it would no longer approve of CardSystems as a processor of its transactions, a move quickly followed by American Express Co.

To address the consumer data security issues, a subcommittee of the House Committee on Financial Services held a hearing in late July (view a transcript of the session at http://financialservices.house.gov/hearings.asp?formmode=detail&hearing=407&comm4 ).

The hearing was entitled "Credit Card Data Processing: How Secure Is It?" and representatives from all four major card brands, CardSystems, the National Retail Federation and financial institutions testified.

We asked members of The Green Sheet Advisory Board (AB) the following questions to garner their insight on the recent events:

It is becoming evident that the federal government is closely scrutinizing the payments industry. Do you think federal regulation of the industry is imminent and if so, what impact will this have on the merchant level salesperson (MLS)?

The AB members' responses, listed in alphabetical order, follow:

Adam Atlas, Attorney at Law

"I think that some kind of federal regulation of our industry is likely, principally to address issues of preserving the privacy of cardholder information. This kind of regulation is already in place, to a certain extent, but will likely be strengthened in light of recent compromises of cardholder information.

"Regulation of other aspects of the industry, such as finer points of the acquiring process is much less likely. In my view, any interference in the acquiring business would run the risk of decreasing competition in that sector, allowing the already large players to take an even greater market share.

"The most useful means of regulation of this industry would be for government to force the Associations to actually disclose the rules by which all participants play. It is backward, illogical and simply wrong to force ISOs and agents to [agree] to be bound by terms that they have never been provided. Many banks nonetheless insist on it. Regulation of the illogical bank system as it is today could also mandate a fair adjudication system over rule violations.

"Another possible means of regulation would be to license agents and ISOs. Government licensing of agents and ISOs, together with some basic ethical standards would perhaps help clean up some of the industry, but it would also impose a bureaucratic and financial burden on the industry that it is not likely prepared to accept.

"The great danger of regulation is that it will stifle business and competition. Any government agency reviewing the possibility of regulation must take this into consideration. Our livelihoods depend on it."

"The federal government already regulates our industry. The Comptroller of the Currency regulates the acquiring banks that process for us, and numerous statutes regulate such things as our credit-granting practices, marketing practices and data sharing and security practices. Are more regulations, especially with regard to interchange, imminent? No. Certainly not within the next year or two.

"Implementing such regulations would be an uphill battle, especially in an economy that values free markets. The lawsuits that allege price-fixing will fail, and strong arguments will be made that interchange is justified and highly competitive.

"Whether or not more regulation occurs, MLSs should be knowledgeable about the regulations that govern our industry. [The Electronic Transactions Association] (ETA) would perform a valuable service by augmenting its publication of Visa and MasterCard regulations by researching, detailing and promulgating more aggressively the myriad federal regulations already in place that affect our business."

"Some regulation is imminent. The question is 'How far will the government regulators go?'

"I personally do not think ETA, the regional [acquirers'] associations, the [National Association of Payment Professionals] (NAOPP), issuing/member banks, leasing companies, ISOs and others in a position to affect MLS behavior in the field have done nearly enough to protect [themselves] from regulation.

"MLSs ... are still running amuck, charging merchants exorbitant fees and equipment pricing, not responding to merchants' calls for help, not requiring minimal training in sales and industry ethics, lying direct to merchants, and so on and on. Perhaps it is not too late, but immediate action must be taken to show the government we are responsible businesses on all levels.

"I believe many ISO owners do not really care or feel overwhelmed about their responsibilities in the field, and are hoping to rack up as much profit as possible as quickly as they can, so when the end comes they already have their bank accounts full of cash and can live happily ever after if regulators drive them out of business.The time to police our industry is here. Which entity will step forward and take the almost-out-of-control situation and make it legitimate in all eyes? We only have ourselves to blame.

"We were hoping education alone would suffice, but it now appears education may not be able to have a substantial effect in a timely manner.

"One positive point is that government regulation takes time. [The] question is if we do not affect change now, how much time do we have? The good operators out there need to begin demanding ethical compliance from those who are not ethical."

"I believe that some level of federal intervention will occur. I think that whatever this level of intervention turns out to be it will be a positive for those MLSs who are straightforward and honest with their clients.

"The reality is that even today, there are a number of folks who simply do not tell the merchant what the truth is."

1. The antitrust suits have the potential to rewrite interchange even more than the impact of the Wal-Mart suit, although I expect that to take years ... In the end, I see major changes coming, and none of them are good for small MLSs.
2. Government regulation due to security concerns will have greater impact on the mid-sized processors such as CardSystems than on the street-level MLS. I have heard people in the industry say that while the breach was severe, the punishment did not match the crime.

"Had it been Vital or First Data, Visa would not have terminated their license, under the 'too big to fail' theory.

"CardSystems was small enough to [serve as] an example. On the other hand, CardSystems likely would not be able to survive the lawsuits, loss of confidence and loss of merchants, so their demise seems inevitable. Visa just sped it up. By doing so, of course, Visa was showing the government it was serious about protecting data and its brand, which are important goals."

"While I don't think federal regulation is necessarily imminent, I do think it is becoming more and more likely every day. There are many unregulated industries in existence today, and my instinct is that the government will intervene first in those industries that deal directly with consumers.

"Ultimately, however, the government will turn its watchful eye to [business-to-business] industries like ours. I believe that their decision to regulate will depend on what we as an industry have done to self-regulate.

"I believe that both merchants and sales offices are taking a greater interest than ever in how effectively and securely the processing industry is run. They are aware of the Associations, of how pricing works, of the growing need for security. If we as an industry do our job of self-policing with enough care and integrity, then the pressure for outside regulation will be much less.

"That being said, I believe that regulation is primarily positive, for everyone from the processor to the MLS. Will we lose the ISOs and agents who find the idea of full disclosure to merchants absolutely terrifying?

"Sure. Those only interested in quick and easy sales will move on to other industries, or will be forced out of ours. But the people who are really dedicated to quality payment processing will still be here, and will have a better climate in which to grow and succeed. For those of us who take this business seriously, the extra education that comes with federal oversight is only positive."

"It is difficult to predict what, if any, regulatory action is imminent. However, now is a great time for processors, ISOs and MLSs to consider what the payments industry can do itself to proactively address merchant disclosure and data security issues.

"Merchants are understandably taking a closer look at their business expenses, including what they are being charged for their electronic payment processing. It is time for processors, ISOs and MLSs to follow Cardservice International's lead with full merchant disclosure. By making innovations in the area of merchant disclosure throughout the industry, we show federal regulators how the industry can self-regulate its procedures.

"It is important to improve the method of disclosure of all merchant fees and contract terms and to deliver those fees and terms to the merchant in a single document. All merchants need clear communication regarding their fee schedule and other pertinent information.

"Merchants will appreciate the fact that processors fully and completely impart to them the terms and conditions of their business relationship and that should, in turn, lead to greater customer satisfaction. "Data security must continue to be the industry's highest priority. The industry must continue being proactive with data security and continue to ensure that transactions are safe. In the ever-expanding world of electronic commerce, all of us in the payments industry are confronted daily with the growing challenge of protecting merchants and consumers from fraud.

"In order to address this challenge and develop solutions, all industry stakeholders, including merchants, consumers and the federal government, must share ownership and work closely to continually review and revise practices that ensure safe and secure transactions, while protecting consumer privacy.

"As a leading processor of credit card transactions, we take our responsibility for diligently monitoring all data that crosses our platforms very seriously, and we are eager to work with our industry partners to enhance and improve practices around the critical issue of data security."

"I believe we have put ourselves under the governmental microscope and that intervention is possible if this industry does police itself. The concept of easy money without basic business practices has led to avarice and simple-minded, quick-fix scams.

"Some sort of intervention, either government or industry driven, seems inevitable at this point; we can only hope that the impact is minimized and takes into consideration which parties are responsible."

"Yes, I am afraid that there will be some sort of federal legislation or regulation to show that Congress is doing something about 'identity theft.'

"Unfortunately, I see the federal response to be an impediment to the acquiring members and ... the ISOs/MSPs and their merchants, without providing any real solution to the problem. Hopefully, any federal requirement will be tied into the industry [Payment Card Industry (PCI) Data Security Standard] and not impose additional or different requirements.

"The impact on the MLS will be slower approvals due to the requisite proof that the merchant is compliant. This will be happening to some degree without any federal regulation. The MLS will have this additional burden of walking the merchant through thePCI standards and/or federal requirements."

"With each new issue that comes to the forefront, we get closer to regulation. Unfortunately, we may be bringing much of this on ourselves. As a former banker, I have first-hand knowledge of the bureaucratic time and effort that occurs from federal scrutiny.

"It was not always this way, but the government steps in, usually when there is a combination of items that, right or wrong, creates opportunity for them to take a public stand. These opportunities always include a consumer or group of consumers that are being wronged and the perception that they cannot fight back against a larger foe.

"The impact of regulation is always bureaucracy. First, an intense study of the system delves every aspect of the business down [to] the simplest common denominator: the salesperson. Following the results of this exhaustive and public study, are a licensing phase and the requisite testing to ensure that certified people are doing the job.

"Of course fees and certification must be included. It is hard to say where we are in this cycle. The leasing industry took preemptive steps years ago to head off these challenges by creating the Certified Leasing Professional [CLP] certification. Course materials and testing were created before an individual could be 'certified' and add the CLP designation to their business and name.

"Leasing associations advertise the delegation to small business. It has worked relatively well in an industry that was close to major regulation. Can it work for the MLS, and is there time? A good question, to which only time and hard work will reveal an answer."

"We have seen that financial security breaches come with little warning and can hit huge numbers of U.S. citizens. In response to this, I think we are definitely going to see some regulation on a federal level. Security infringement and identity theft issues have created real fear for many people today. If these problems go unchecked, consumers are going to start making the credit card companies the bad guys, and that will impact everyone in the payments industry."

"We believe that federal intervention may be inevitable. We have been allowed to police ourselves to this point, but we need to do a better job.

"Federal intervention will hinder sales force recruiting, but education for the salesperson will also increase the quality and reliability of the information given to the merchant. ... It had been suggested that a national licensing program for the sales forces (like that of insurance agents or stockbrokers) might also be put in place."