Chip Cards Slap U.S. Merchants With Unexpected Higher Debit Feesby
Terminals seen favoring Visa, MasterCard signature systems
Wal-Mart suit highlights issue facing retailers of all sizes
Wal-Mart Stores Inc.’s lawsuit this week against Visa Inc. over how debit transactions are verified is casting a spotlight on an issue that’s been plaguing U.S. retailers since they began accepting European-style chip cards last year.
Some merchants have seen their debit-transaction fees increase by about 20 percent since Oct. 1, the deadline by which most stores were supposed to start accepting chip cards or face some fraud liabilities, according to Crone Consulting LLC, which specializes in retail payments.
In the past year, many merchants changed their payment terminals so consumers could use the newfangled cards. The problem is that about two-thirds of the new readers at smaller retailers aren’t set up right, according to Richard Crone, chief executive officer of the consulting firm. Their software tends to favor debit-payment networks from Visa and MasterCard Inc. over other systems, which can be cheaper for merchants on certain transactions, he said.
For example, when customers insert a chip-based debit card into a new terminal, they may be offered only Visa’s network as the choice. Or they may see two options: “Visa debit” or “U.S. debit.” Since most consumers don’t know what “U.S. debit” is -- it’s actually is a link to smaller networks like NYCE -- they usually pick Visa.
Instead of being prompted to enter their PINs, shoppers are asked for a signature, and the merchant is charged from 1 percent to 2 percent per transaction when a card is issued by a smaller bank. About a third of all debit cards come from financial institutions with less than $10 billion in assets, whose fees aren’t capped under an amendment to the U.S. Dodd-Frank Act.
By contrast, most PIN-based debit-card transactions, such as those over the NYCE network, have average fees of about 25 cents -- and slightly more for cards issued by smaller banks. Visa and MasterCard have PIN-based debit networks too, but many of the new terminals are set up to favor their more expensive signature systems.
“This happens daily,” said Roger Fillers, owner of Seaside Auto Repair in Satellite Beach, Florida. “Somebody is raking in a pile of money somewhere, and it’s not fair.”
The extra fees will add up to as much as $7,000 a year, Fillers said, a significant loss for a small business like his. More than 1 million retail locations in the U.S. can take chip cards, and more than two-thirds are small to midsize businesses, according to Visa.
Even the world’s biggest retailer is affected by the migration to chip cards. Wal-Mart filed a heavily redacted complaint in New York state court on Tuesday claiming that Visa USA wants it to verify transactions made via certain debit cards with signatures rather than the chip-and-PIN protocol, which is more secure and has lower interchange fees.
“Visa nevertheless has demanded that we allow fraud-prone signature verification for debit transactions in our U.S. stores because Visa stands to make more money processing those transactions,” Wal-Mart spokesman Randy Hargrove said in an e-mail.
Visa declined to comment on the complaint.
The main issue is that under the amendment sponsored by Senator Richard Durbin of Illinois, an ally of the retail industry, merchants must be given at least two options for routing transactions. However, many processing companies and vendors haven’t upgraded their clients’ terminals with software designed to steer transactions to the least-expensive debit network. In many cases, the choice is preset, or it’s shoppers who are making the decision when they are prompted to choose a network.
Unlike mom-and-pop stores, some larger retailers have the financial clout to tweak their software. Supermarket giant Kroger Co., for example, set up its terminals so as to not even allow the costlier signature debit transactions.
Visa and MasterCard say they don’t limit consumer choice and are often selected by shoppers because their brands are already well-known. Regardless of which network shoppers choose, their cost is the same. It’s only the merchants who are charged the interchange fees.
The higher fees have added to the list of costs borne by merchants accepting chip cards. They had to pay for new point-of-sale equipment, stand in long lines to have it certified, train store associates, and deal with transactions that take about 10 seconds more than the old cards with magnetic stripes.
The new cards are based on a technology called EMV, named after its backers: Europay, MasterCard and Visa. Offering more protection against fraud than magnetic stripes, EMV is becoming the global standard for credit-card and debit payments.
“The initial deployments of EMV were really not optimized to direct transactions to debit networks, and we did experience a shift of those transactions to Visa and MasterCard,” said Robert Woodbury, senior vice president and general manager of NYCE Payments Network. Only 5 percent to 7 percent of his network’s merchant traffic currently comes from chip cards, so the impact so far has been small, he said.
On March 17, Durbin, a Democrat, sent a letter to EMVCo, an organization governing the move to the new chip technology, with questions about the implementation.
“What assurance does a small network have that EMVCo’s specifications will not have the effect of steering consumers or card acceptors away from small networks and toward EMVCo’s six member organizations?” the letter said. Visa and MasterCard are among the member companies.
The National Retail Federation, the industry’s main trade group, noted that the EMV system was established by the card companies, which were created by the banks.
“Many of the systems were set up to the most expensive form of routing the transaction, which is typically a Visa,” said Mallory Duncan, an NRF senior vice president.
While the terminals’ software can be updated to promote lower-cost debit networks, that may require the readers to be recertified, a long and costly process, Duncan said.
Visa says it doesn’t mandate any particular approach with merchant terminals.
“It’s important to remember that the debit environment is very competitive, and Visa actively competes for transactions,” the company said in a statement. “If we are not competitive, we will not win business.”
MasterCard said its and Visa’s networks are often chosen simply because they are the most well-known.
“It boils down to a historical thing,” Ajay Bhalla, president of enterprise risk and security at MasterCard. “These two organizations are very large; they are some of the most popular ways anywhere in the world” for customers to make payments.