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Kevin Smith

MasterCard's (Not So) New Policy

22 April 2002

A new policy by MasterCard doesn't mean the end of third-party payment processors as previously suggested in the press. Nor does it mean new headaches for the online gaming industry, according to a spokesman from third-party processor PayPal.

Initial media reports indicated that third-party processors like PayPal would be phased out because online merchants would be required under the new policy to set up accounts directly with MasterCard.

"Nothing will change for online gaming," he said. "You already can't use your MasterCard in the PayPal system for online gaming."

- Vince Sollitto

MasterCard has since made an attempt to ensure e-commerce industries that many of their systems won't be affected. The association today issued a detailed statement regarding what it called a "clarification" of a rule that has existed for decades. The guidelines, MasterCard stated, are "aimed at protecting consumers, merchants and our member financial institutions."

According to the statement, "Nothing in this clarification would prohibit third-party processors from processing MasterCard transactions in accordance with our rules, and in so doing building their businesses by providing a broad range of services to the merchant community."

Vince Sollitto, a spokesman for PayPal, said MasterCard is indeed implementing a new policy, but said his company won't be hurt by the new regulations.

The current system, he said, allows small-level merchants--companies that sell items on eBay, for example--to accept MasterCard without suffering the high cost of getting a merchant account or paying transaction fees. Instead these companies can get accounts with PayPal at half the cost and their customers can add money to their PayPal accounts via their credit cards.

The problem with the system is that MasterCard has no control over what the PayPal card is used for because there is no tracking system between the MasterCard transaction and the final PayPal transaction. When the newly clarified policy goes into effect on May 1, MasterCard will require that agreements be in place between merchants and third-party providers or MasterCard directly to track such transactions. Sollitto said such an agreement could include a special tag code being given to a merchant that would be used every time they make a PayPal transaction.

"It will just give them more knowledge of how the card is being used," he said. "They will then be able to track things and assess higher-risk areas accordingly."

One of those higher-risk areas is online gaming, he said, but he also pointed out that the new policy, which encompasses all transactions, had already been applied to Internet gaming sites for nearly a year.

"Nothing will change for online gaming," he said. "You already can't use your MasterCard in the PayPal system for online gaming."

Visa and bankcards can be used via the PayPal system to bank online gaming, Sollitto said, but that amount of business represents a small portion of the PayPal system.

Through its statement, MasterCard said the policy is geared to the increase in credit card fraud and high chargeback rates among some sectors, of which online gaming is included.

"Our rules have always required that merchants have a valid agreement with a MasterCard member," the statement read. "Those members will, in turn, verify that the merchant qualifies to participate in the MasterCard system, that consumers are protected in the event of a dispute and that the integrity of the global payments system is maintained."

MasterCard also said the clarification is aimed at maintaining the high standards that come along with being a part of the MasterCard system, whether it be directly or indirectly.

"MasterCard's rules also benefit merchants who participate in the MasterCard system," the statement read. "MasterCard 's rules are designed to protect its cardholders, its merchants and its member financial institutions by ensuring, among other things, that all companies who hold themselves out as a participant in the MasterCard system are entitled to do so."

Visa so far hasn't implement a similar policy. Nor has it expressed intentions of doing so.

MasterCard's (Not So) New Policy is republished from
Kevin Smith
Kevin Smith