Mom and pop stores are feel­ing less se­cure about chip-card read­ers

Some small busi­nesses pay more when con­sumers use chip cards “Visa stands to make more money pro­cess­ing those trans­ac­tions”

Bloomberg Businessweek (Europe) - - CON­TENTS - Edited by Jeff Muskus and Matthew Philips Bloomberg.com

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.

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