Scores of Credit Card Middlemen May Increase Fraud Risk

June 20, 2005 — -- Before it announced last week it had put 40 million credit card accounts at risk for theft or fraud, most Americans had probably never heard of CardSystems Solutions Inc. or knew it had their most sensitive financial data on file.

But despite their relatively low profile, credit card processing companies like CardSystems play a central role in nearly every credit card purchase in the country. Depending on the agreement with merchants or card issuers like MasterCard or Visa, CardSystems' services may range from simply facilitating a credit card transaction to actually monitoring and retaining cardholders' account information.

"The credit card processing industry is not as simple as just sending the information. For some of the card issuers they do everything," said Ariana-Michele Moore, senior analyst with Celent LLC.

Whatever the level of involvement, the shifting of sensitive data between merchants, processors and card issuers can create opportunities for thieves to steal consumers' financial data.

Perhaps most troubling for consumers, there are at least 100 different companies that help process credit card purchases, so it is nearly impossible for consumers' to know who might have their personal financial data.

These firms are largely responsible for making a shopping spree as easy as swiping a card, but they also increase consumers' exposure to financial crime.

"The credit card processing industry is not as simple as just sending the information. For some of the card issuers they do everything," said Moore.

So who are these companies, and what do they do?

CardSystems and scores of similar companies help merchants and credit card issuers like Visa or MasterCard process credit card purchases electronically. In most instances, they provide the machines used to swipe a credit card at the checkout counter, and they're responsible for electronically transmitting the card's account data to the banks that authorize credit purchases.

For online merchants, they offer secure Web sites for customers to enter credit and billing information.

Industry analysts say this service is used in up to 99 percent of all U.S. credit card purchases. Businesses ranging from mall boutiques to retail mega-retailers like Target and Wal-Mart to Internet merchants use processors to set up their payment systems and electronically process credit transactions.

CardSystems and its competitors offer technology infrastructure and services that would be a massive, expensive undertaking for credit card companies or merchants to handle alone. In exchange, they charge retailers a start-up fee as well as a small transaction fee for each credit card purchase, typically about 30 cents to 50 cents per transaction.

"The technology involved can be fairly expensive, so it's a lot more efficient for a handful of processors to handle the processing themselves. The cost benefit is realized by merchants and customers," said Hugh Gallagher, engagement manager with Edgar, Dunn & Company, a management consulting firm that works with payments industries like credit card companies.

Once a credit card has been entered either electronically or swiped at a store terminal, account information is sent through a maze of steps and passed through several different hands before the purchase is finalized.