Company to bar transactions by payment processor

Tuesday, July 19, 2005 | 9:40 a.m.

Visa USA said on Monday that it would stop allowing the payment processor CardSystems Solutions to handle its transactions, months after the processor left the records of millions of cardholders at risk for fraud.

"CardSystems has not corrected, and cannot at this point correct, the failure to provide proper data security for those accounts," said Tim Murphy, Visa's senior vice president for operations in a memorandum sent to several banks that was obtained by The New York Times. "Visa USA has decided that CardSystems should not continue to participate as an agent in the Visa system."

Cardholders and merchants should not be affected by the change.

Visa said its decision to remove CardSystems came after a review and an independent investigation found that the payment processor had improperly stored cardholder data and did not have the proper controls in place.

It is unclear if MasterCard and American Express will take similar action, but with Visa accounting for more than half of all card transactions, the move raises questions about the future of CardSystems.

"I've never heard of them booting off a processor," said Avivah Litan, a security analyst at Gartner Inc., a technology research group. "The worst thing that I've heard is a processor that had to cough up $1 million."

The move came at least two months after Visa first learned that data had been compromised and just days before its executives, along with those of other major card companies, have been called to testify in Washington about their security practices. The chief executive of CardSystems, John M. Perry, is also expected to testify on Thursday.

In a statement released on Monday, CardSystems said Visa's decision was unexpected and upsetting.

"We are disappointed and very surprised that Visa has decided to take this action today, not only because of the impact that it will have on our employees, but the disruption that it will cause to our 110,000 merchant customers," the processor said in a statement. "We hope that Visa will reconsider."

Visa has given at least 11 banks, which hired CardSystems to handle the merchant transactions, until the end of October to change processors, the memo said. Until then, CardSystems will be allowed to process Visa transactions as long as it has corrected any problems and allows a Visa-affiliated monitor on site to oversee its operations in Tucson, Ariz. CardSystems is also banned from handling Visa transactions from its international affiliates or any new merchants, processors or member banks in the United States.

Visa had been weighing the decision for a few weeks, but as recently as mid-June said that it was working with CardSystems to correct the problem. Earlier this month, CardSystems hired an outside security assessor to review its policies and practices, and it promised to make any necessary upgrades by the end of August. CardSystems, in its statement on Monday, said the company's executives had been "in almost daily contact" with Visa since the problems were discovered in May.

Visa, however, said that despite "some remediation efforts" since the incident was reported, the actions by CardSystems were not enough.

"Visa cannot overlook the significant harm the data compromise and CardSystems' failure to maintain the required security protections has had on member financial institutions and merchants as well as the significant concerns it raised for cardholders," the company said in a statement.

At this point, it is unclear what the other branded card companies will do. MasterCard has previously said that it was giving CardSystems a "limited amount of time to demonstrate compliance with MasterCard security requirements" but never laid out a specific timetable.

Sharon Gamsin, a MasterCard spokeswoman, did not return calls seeking comment. Judy Tenzer, an American Express spokeswoman, said the company did not comment about its relationships with vendors. Leslie Sutton, a Discover Financial spokeswoman, could not offer an immediate response.

Visa's decision is the latest development since it was made public in mid-June that the CardSystems computer network had been compromised, putting the cardholder names, account numbers and security codes of as many as 40 million credit and debit cardholders at risk for fraud. The information of about 22 million Visa cardholders was exposed; MasterCard reported the data of 14 million of its cardholders was potentially at risk; and the rest largely belonged to customers of American Express and Discover.

At the time, Perry of CardSystems acknowledged that the company had been improperly storing data, violating Visa and MasterCard security rules. He said data thieves directly obtained information related to some 200,000 cardholder accounts.

In its statement, Visa offered its most scathing indictment of those security violations to date. The chief executive of CardSystems had "stated that the company knowingly retained unmasked magnetic stripe cardholder data, purportedly for 'research purposes,"' Visa said. "Visa's security requirements were adopted precisely for the purpose of protecting cardholder information and guarding against the type of data compromise recently experienced by CardSystems."

In the letter that Visa sent to the banks, Murphy suggested that the data breach occurred as early as August 2004.

Despite the violations, Visa has allowed CardSystems to handle its transactions. So did MasterCard, Discover, and American Express.