Yesterday I mentioned that card processor First Data told Frontier they would withhold 100% of their credit card processing fees... starting, May 1st, which ironically is also known as May Day! (Venez m'aider for my Canadian friends!)

The airline industry should see this movement as not only the distress signal that it is, but also a sign of things to come if they don't prepare a plan that protects them from being held, dare I use the word?, "hostage" by credit card processors.

One such plan would include further instituting and utilizing HomeATM's PIN Debit Platform which would eliminate reserves in their entirety and lower their card processing costs significantly.

Today I bring you an article from the Denver Post. Should you desire to do so, click this link which will bring you to thei DP's site where you can read related articles, including comments from readers about this very interesting and "still developing" fiasco.

Here's the story...

Frontier Airlines pointed the finger of blame directly at First Data Corp. for its bankruptcy filing Friday. Greenwood Village-based First Data responded with regrets that "economic conditions" forced the Denver-based airline into reorganization, but otherwise kept quiet.

So how did the two hometown corporations get into a stand-off that will have to be settled in bankruptcy court? Credit-card processors like First Data will ask merchants for more collateral to protect themselves when financial conditions deteriorate. Those same financial stresses, however, make a merchant less able to meet those demands — what some observers call a formula for ankruptcy.

'It happens regularly, particularly with the small and low cost carriers who have so much of their revenues tied up in credit-card transactions to begin with," said Jack Williams, a resident scholar at the American Bankruptcy Institute

Demands from credit-card processors are often the untold story behind many bankruptcies, Williams said, which makes Frontier's public outing of a company it needs to survive so unusual.

When consumers make a credit-card purchase, they have a guarantee from Visa and MasterCard to cover things like defective goods or undelivered services. Merchants get paid quickly even if the actual delivery takes place months later — say an airline or cruise ticket purchased in April for a trip in August. Although Visa and MasterCard offer the guarantees, credit-card processors are on the hook if merchants can't make good. Potential losses can be several times beyond any profits generated.

To protect themselves, credit-card processors require merchants to maintain a reserve, usually funded by holding back a certain percentage of the credit-card receipts they collect. "They are underwriting the risk. They are the ones who will be stuck if the merchant goes down," said Adil Moussa, an analyst with Aite Group, a Boston research firm.

Frontier maintained a $54.5 million credit-card deposit with First Data and one of $18.5 million with American Express, according to the company's bankruptcy filing. Frontier got news in letter Frontier reported that First Data sent it a letter Tuesday lifting the reserve requirement to $130 million. Until Frontier met that higher cap, First Data said it would hold back half of the company's credit-card revenues.

That First Data requires reserves is standard industry practice, and it's also standard to raise them when risks increase, said Jim Daly, a senior editor with Digital Transactions, an industry trade publication.

But lifting reserve requirements sends a loud distress signal to the market. "A 50 percent holdback signals all creditors that it is a serious financial situation and you have an impending bankruptcy," Williams said.

Unable to survive on half rations of cash flow for any length of time, Frontier sought bankruptcy protection. While holdbacks can trigger a bankruptcy filing, they aren't the "cause."

But Moussa questions whether First Data could have handled things differently. "One can't help but wonder if First Data is overreacting and really pushing one of its customers toward bankruptcy," Moussa said. And what happens if all credit-card processors respond to a rash of four airline failures by raising reserve requirements on all carriers, he asks. "It might just be the nail on the coffin for the already ailing industry," he said.

First Data faces pressures of its own. Kohlberg Kravis Roberts & Co. acquired the once public company in a leveraged buyout last fall, lifting the debt on its balance sheet from $2.5 billion to more than $22 billion. For 2007, First Data recently reported revenues of $8.1 billion and a loss of $907 million. That compares with revenues of $7.1 billion and a net income of $1.5 billion in 2006.

How First Data deals with merchants is somewhat mechanical, not unlike bank debt covenants, and entirely contractual. But Williams wonders if the entire credit crunch hasn't made all financial players much more fearful, a little quicker to pull the trigger when things turn south.

Despite any public posturing, Frontier and First Data are expected to reach a compromise as quickly as possible and their lawyers are reportedly already talking. The bankruptcy filing also blocks First Data's plans to hold back credit-card revenues. "It is to everyone's benefit to work this out quickly. I'm talking days. It won't go weeks or months," Williams said.

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"HomeATM" - 5 new articles

1. Airlines Can Have 100% of Their Credit Card Transactions Withheld!
2. Frontier Airlines Blames Credit Card Processor for Bankruptcy Filing
3. PCI Standards Again Questioned in Wake of New Breach
4. HomeATM Officially Invites ATMDirect to a "PIN Off"
5. Study Reveals PIN Debit Provides Lowest Fraud Rate
6. More Recent Articles
7. Search HomeATM

The Airline Industry, thanks to First Data may now consider HomeATM's PIN Based Platform as their primary payment choice

HomeATM recently signed a deal with Universal Air Travel Plan (UATP) and if anyone was wondering why the Airline Industry is interested in HomeATM's platform, you need to look no further than this mornings announcement that Frontier filed for Chapter 11.

This week, I was notified by our credit card processor that, as of Friday, April 11, due to "current economic conditions, the rise in fuel costs and the other bankruptcies around the industry," they intended to start withholding 50 percent of the credit card funds received from the sale of Frontier tickets.

If they went ahead and did this, tens of millions of dollars owed to us by our customers would have been withheld by the credit card processor, First Data. This would have drained our available cash almost immediately and would have made it impossible for us to continue normal operations.

Therefore, we decided to file Chapter 11 in an effort to fight this unwarranted step by the credit card processor so that we can continue to position the Company for long term success.I want to emphasize to each of you that this was very sudden and unexpected. We are the victims of a credit market that is very fragile and the tolerance for risk is extremely low. As I have stated many times recently, our executive management team has been working diligently and tirelessly to extend our runway by securing additional cash to bolster our balance sheet. We were successfully making progress on a number of fronts that would position us well for the future and with the protection of the bankruptcy court, we plan to continue to pursue those opportunities.

Interestingly, the brick and mortar world, (the one chock full of PCI Standard compliance demands), seems less secure than the Online world. Yet online retailers pay exhorbitantly higher fees than brick and mortar retailers. Card Not Present transactions are certainly higher risk transactions, but HomeATM's Internet PIN Debit platform, combined with their PIN Entry Device (PED) could cut risk significantly and thus save online retailers 100 basis points off their Interchange fees.

In yet another breach, this one from Advanced Auto Parts, Retail Wire questions whether or not we should move to Chip and PIN based transactions.

Here's the discussion in today's Retail Wire...

And yet again, an American retailer and its customers go down the road of data theft. In this case, the retailer is Advance Auto Parts and the most recent hack affected 56,000 of its shoppers in eight states - Georgia, Indiana, Louisiana, Mississippi, New York, Ohio, Tennessee and Virginia. Luckily, the customers from the stores in question represent a small portion of the total shoppers that frequent the chain's 3,261 stores across the country.

The discovery of the breach, as with those at other retailers, has prompted Advance to reassess its security measures. Others, at the same time, are once again questioning if Payment Card Industry (PCI) compliance standards are either fair or effective.

In a recent interview with RIS News, Dave Hogan, senior vice president and chief information officer with the National Retail Federation (NRF), expressed the view that more secure forms of payment such as "Chip & Pin" were available and proven in reducing fraud. He suggested that card associations should "provide (at no cost to the merchant) card readers that can accept these new types of cards."

Mr. Hogan also took issue with the amount of data that merchants are required to keep by banks. He called on financial institutions to "state that 'Retailers have the option to no longer store credit card data and they will not be penalized for not keeping credit card data."

To read the Retail Wire discussion, click here. I'm sure it will garner a lot of responses. Here is one from Evan Shuman, former eWeek contributor and StoreFrontBackTalk Editor:

To answer your question, yes, Hogan's concerns are quite reasonable. Much of this, though, is a lot of agreement on the easy issues. There are few who truly argue with the following:

1) PCI is not perfect and retailers who are fully compliant are still fully vulnerable. Even PCI's backers agree with this. PCI was never intended to be perfect security. PCI was never intended to be anything beyond a good starting point.

2) PCI has absolutely improved retail security today. Again, this is pretty much done unanimous. It's not gone nearly far enough, but any movement forward is good.

3) Banks are, for the most part, much better choices than retailers to store sensitive payment data. Again, no one ultimately quarrels with this. The issue involves infrastructure, politics and business costs. To make this transition would require tons of agreement from people who are not motivated to make such agreements. So arguing that it's better doesn't help much if it can't be done given the powers that be.

4) Chip and PIN is more secure than what much of the U.S. is doing. True. But Chip and PIN--as it's deployed in the U.K.--also has many issues. Making the transition would be costly, would meet with substantial infrastructure resistance AND it would still retailers far more exposed than is desirable. For the same extreme effort and cost, we could probably come up with a more secure approach.

It's also true that if all retailers strictly adhered to the common-sense rules (no default passwords, examine traffic logs routinely and seriously, strictly enforce procedures, etc.), we'd also be far better off.

This, however, doesn't address the Hannaford scenario where--based on currently available information--we have a retailer that indeed appeared to abide by all of the rules and still got burned by some aggressive cyber thieves. That's the more rare but far more frightening scenario.

Evan Schuman, Editor, StorefrontBacktalk.com

Card Present Solution for Online e-commerce Retailers

Traditional e-commerce is based on Card Not Present (CNP) transactions; i.e. the cardholder enters credit / debit card data using an online form. There is no way to prove that the user entering the card information is in fact the actual cardholder. To truly identify the cardholder the card needs to be processed via some form of hardware device that interrogates the card in order to match the data entered by the user with data phyiscally stored on the card.

Enter Home ATM. The HomeATM solution is based on an Internet consumer connecting the HomeATM device to their PC via a USB port. Once installed and configured the HomeATM Scanpad may used to process card present credit card and PIN debit card transactions via the Internet, resulting in less risk for all parties.

Payment for goods using PIN based Debit Cards as the settlement instrument of choice is the fastest growing card sector in the world at present. PIN based Debit Card settlement offers merchants a number of benefits such as Zero Chargeback and NO Risk.

Traditionally the ability to accept PIN based debit cards has been reliant on the card issuer. Home ATM removes this reliance - any debit card, issued by any issuer can be processed by merchants. Technically it's exactly the same transaction type as a user using a POS device or an ATM device.