Merchants Are Slapped With Higher Debit Fees
Some small businesses pay more when consumers use chip cards “Visa stands to make more money processing those transactions”
When Roger Fillers, who owns Seaside Auto Repair in Satellite Beach, Fla., switched to a chip-card payment system last fall, he didn’t think it would cost him money. Fillers has typically offered customers using debit cards a discount, since it costs him only about 25¢ per debit transaction instead of the higher fee for credit cards. But with the new chip-card readers, each time a customer pays with a debit card from a smaller bank, Fillers pays a 1 percent to 2 percent fee. (About a third of all debit cards in any given metro area are issued by smaller banks with less than $10 billion in assets, which can charge as high a fee as they want under the DoddFrank Act.) On expensive jobs like a rebuilt engine, that adds up. Fillers expects to pay $7,000 more in card fees this year and is considering doing away with his debit card discount. “Somebody is raking in a pile of money somewhere,” he says.
As U.S. retailers change their payment systems from magneticswipe to chip-card readers, many are finding it a costly transition. Visa and Mastercard gave merchants until last October to begin accepting chip cards. Those who didn’t meet the deadline are now held liable for counterfeitcard fraud. But of those who made the switch, many are stuck paying steeper fees. Since October, some merchants have seen their debit-transaction fees increase about 20 percent, according to Richard Crone, chief executive officer of Crone Consulting, which specializes in retail payments.
The problem, says Crone, is that about two-thirds of the new readers at smaller retailers come with software that’s preset by third-party vendors to route payments toward the signature debit networks of Visa or Mastercard instead of toward cheaper debit networks operated under brands such as NYCE and Star. Not only is that more expensive for the merchants, it’s less secure, since the Visa and Mastercard networks require customers to sign their name rather than enter a private security PIN. Visa and Mastercard have Pin-based networks, too, but many chip readers are set up to favor their more expensive signature systems.
Big retailers dislike signature-debit, too, and are starting to fight back. Supermarket giant Kroger set up its terminals to not even allow the costlier transactions. On May 10, Walmart Stores sued in New York state court, claiming that Visa USA wants it to verify transactions made via certain debit cards with signatures rather than the chip-and-pin protocol, which has lower fees. Walmart is arguing it should be able to choose whether to accept signature-debit transactions. “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
“Many of the systems were set up to the most expensive form of routing the transaction, which is typically a Visa.” —— Mallory Duncan, NRF
money processing those transactions,” Walmart spokesman Randy Hargrove said in an e-mail. Visa declined to comment on the complaint.
When consumers use a chip debit card, they’re sometimes given a choice of where to route their transaction: either to a Visa or Mastercard network, or to a cheaper one labeled U.S. debit. Since consumers don’t always know what U.S. debit is, they often choose the best-known brands. Visa and Mastercard claim they don’t limit consumer choice and are chosen because they’re well-known. Regardless of which network shoppers choose, their cost is the same. It’s the merchants who pay the higher fee, which only adds to their costs for accepting chip cards. Merchants also have to pay for equipment, stand in long lines to have it certified, train store associates, and deal with transactions that take about 10 seconds longer than cards with magnetic stripes.
The National Retail Federation notes the chip- card system was established by the big credit card companies, which were created by banks. “Many of the systems were set up to the most expensive form of routing the transaction, which is typically a Visa,” says 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 by third-party vendors, a long and costly process, says Duncan.
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.” Ajay Bhalla, president of enterprise risk and security at Mastercard, says it “boils down to a historical thing. These two organizations are very large; they are some of the most popular ways anywhere in the world” for customers to make payments. �Olga Kharif The bottom line Transactions routed through Visa’s and Mastercard’s pricey systems are costing some merchants higher debit fees.