Online Merchants, Issuers Begin to Respond to SecureCode Incentives

Deep discounts on interchange rates for Internet transactions authenticated through MasterCard International's SecureCode technology are taking effect just as the security system appears to be attracting more issuers and online merchants, according to a vendor of online authentication systems that supports both SecureCode and Visa USA's rival Verified by Visa (VbV) security technology. Between 13% and 15% of all SecureCode transactions processed through systems supported by CardinalCommerce Corp. in last year's fourth quarter were fully authenticated, meaning both merchant and issuer processed through SecureCode. That's up from fewer than 1% in the first quarter of 2004, says Michael A. Keresman, chief executive and president of the Cleveland-based software company. Now, with the pricing incentives in place and merchants past the busy holiday season, “the majority of [online] merchants we've talked to are activating [SecureCode] or are going to acitivate it in the first quarter,” Keresman says. “And we're seeing an increased level of issuer participation.” MasterCard reports that, as of Nov. 30, 64,230 merchants worldwide were supporting SecureCode, up from 48,000 last spring. The bank card network also says 3,067 issuers were participating as of Nov. 30, or about 12% of MasterCard's global membership. The association would not report numbers for North America only. In a statement released yesterday, MasterCard announced new interchange incentives for SecureCode as part of a broad card-data security initiative that also includes free network-security scans for both online and brick-and-mortar retailers. In reality, however, the new pricing incentives went into effect Oct. 1, and MasterCard had announced them to its members last spring (Digital Transactions News, March 18, 2005). The new pricing reflects deep discounts from the so-called card-not-present rates most online merchants pay and go well beyond a 10-basis-point incentive discount Visa introduced last April for VbV. Indeed, by offering interchange relief of up to 16% on SecureCode transactions, MasterCard says it is reducing online transaction rates nearly to the level of card-present rates?though a spokesman stops short of saying the reduced SecureCode rates equal rates for brick-and-mortar retailers. “It's much more comparable to face-to-face transactions,” the spokesman says. Both associations have been disappointed at merchant adoption of the so-called 3-D Secure authentication system?the generic technology from which both VbV and SecureCode are derived?and by introducing pricing incentives are said to be responding to acquirer and merchant complaints that the technology is costly to install while covering a limited range of chargeback reason codes. The new rates acquirers?and, by extension, Internet merchants?pay for SecureCode transactions depend on whether the transaction is a credit or debit payment and on whether the card issuer has also enrolled in and enabled SecureCode. For credit and debit card payments, the new interchange rate is actually lower when the merchant, but not the issuer, participates. The case when both parties participate refers to what MasterCard calls a fully authenticated transaction. Industry sources say the lower rate for transactions not fully authenticated?when only the merchant is using SecureCode?is meant to encourage merchant enrollment in the program without waiting for issuers to climb aboard. As a sweetener to issuers, MasterCard includes in its new pricing a 10-basis-point increase in interchange income for issuers that enroll and enable SecureCode. MasterCard also introduced a small stick to go with its substantial carrot. Effective Oct. 1, interchange for merchants not enrolled in SecureCode increased 5 basis points, to 1.95% plus 10 cents on credit card transactions. Interchange on signature-debit payments stayed the same, at 1.64% plus 16 cents. Effective the same day, credit card interchange on fully authenticated transactions dropped 22 basis points from the new rate to 1.73% plus a dime. For credit card transactions not fully authenticated, the cut is 32 points, to 1.63% plus 10 cents. On an $80 Internet order not fully authenticated, a merchant adopting SecureCode now pays $1.40, saving 26 cents. Debit interchange on fully authenticated payments plunged 49 basis points on the rate and a penny on the fixed fee, to 1.15% plus 15 cents. Transactions not fully authenticated dropped 59 basis points and a penny, to 1.05% plus 15 cents. This means merchants now pay 99 cents on an $80 SecureCode debit transaction not fully authenticated, a 48-cent, or 33%, cut from the regular rate. In addition to pricing incentives, both Visa and MasterCard have introduced rules that shift the liability for losses arising from certain chargebacks from merchants to issuers when merchants adopt 3-D Secure. Visa allows the shift whether or not issuers have enrolled. MasterCard requires that the transaction be fully authenticated. With 3-D Secure systems, consumers enter private codes, similar to PINs, when they are ready to check out and pay on merchant Web sites. Issuers return an authorization when the code entered matches the code they have on file. CardinalCommerce's Keresman says the onset of the holiday rush preoccupied most online merchants in the fourth quarter, so most are only now responding to the incentive pricing. He says that in the cases he's seen so far, acquirers are passing the rate reductions on to merchant clients. “It wasn't going to be adopted in earnest until the first of the year,” he says. Now, Keresman says, he expects a rush to install the system. The incentives, he says “have hit the mark,” since by cutting transaction costs they have broad appeal to merchants, regardless of fraud rates. “We have a pretty good book of business,” he says. “We're pretty darn bullish on it.”