MasterCard Tougher on 3d Parties
Tightens Supervision of Credit Card Processors
Aiming to reduce exposure to risk for its member institutions, MasterCard International has published new rules to beef up supervision of third-party credit card processing businesses.
Such businesses, known to MasterCard as member service providers or MSPs, solicit merchant business for banks.
Then these third-party processors install and service the equipment necessary to execute credit card transactions. This activity has become known in the industry as outsourcing.
Most member service providers are not permitted to be members of the MasterCard network on their own. But the service providers are becoming increasingly involved in member-only activities -- such as settling transactions and executing chargebacks.
Cause for Some Grief
MasterCard is not happy with this development.
"More and more we're seeing situations where a financial institution is paid to act as a front for a nonmember who wants to be in the credit card business," said Andrew L. Cheskis, a vice president at MasterCard International in New York.
"We've got to plug the loopholes that allow them to do that."
According to Mr. Cheskis, the rising power of member service providers is dangerous for two reasons.
First, service providers connected to the MasterCard name through financial institutions are not directly governed by MasterCard rules. So the credit card association fears the actions of member service providers may damage its brand name.
If member service providers operate unchecked, they may pose a serious financial risk to the banks with whom they maintain contracts.
MasterCard and Visa member financial institutions are always financially liable for the actions of their service providers.
Member Banks Responsible
If, for example, a contract secured for the bank by a member service providers results in a large number of chargebacks, the member bank is financially responsible -- no matter how far removed it is from the everyday card operations.
In the past two years, a number of institutions, including Comerica Inc., Detroit, and Colorado National Bankshares, have been stung by their relationships with member service providers.
Colorado National suffered a $2 million hit to its 1989 earnings when Credit Processing Systems Inc., Minneapolis, closed its doors without fulfilling its payment obligations. Comerica took a $4.8 million loss when Check Reporting Services Inc., Lansing, Mich., went bankrupt.
Reasons for Tougher Rules
As the banking industry becomes more strapped for capital, Mr. Cheskis and others have commented that a tougher set of rules is necessary.
If a member service provider "sticks you with a $4 million or $5 million bill, that cash is going to come from your capital, and most banks just don't have it these days," Mr. Cheskis said.
Put into effect early this month, the new regulations are tougher on MasterCard members than previous measures imposed in 1989. MasterCard's goal is to indirectly regulate the actions of the member service providers.
The 1989 rules required members to register member service providers with MasterCard and to settle transactions directly with the merchant, not through member service provider accounts. But there are important revisions:
* Fees to register member service providers with MasterCard have increased and will be paid by the member banks, not the member service provider.
* All promotional material used by member service providers must reflect its relationship with the MasterCard member.
* Stiff penalties of $5,000 to $50,000 will be assessed on members that fail to comply with rules regulating the providers.
* In cases of extreme abuse, a license may be terminated.
Visa Equally Concerned
MasterCard is not alone in its concern about the power of the providers.
Visa International has imposed similar rules designed to make member institutions "review the risks attendant to the relationship" between banks and their service organizations.
"There is nothing inherently wrong with member service providers -- the value of outsourcing certain bank functions has been proven effective," said MasterCard's Mr. Cheskis.
"The rules are aimed at limiting the abuses in the system."