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The Brewing Battle Over the Chip Card


Call it the battle of Goliath vs. Goliath. Walmart, the nation’s largest retailer is taking on financial behemoth Visa in New York Supreme Court.

What’s the beef? Those wonderful chip cards that as of late last year became the lay of the land in the U.S. Ben Woolsey, president and general manager of CreditCardForum.com explains, “Walmart contends that they should have the right to force their customers to enter a PIN when paying with a chip-enabled Visa debit card, but that Visa is allowing them the choice to perform a signature transaction (which Walmart contends is “fraud-prone”) at the point of sale. Allowing customers choice is a requirement under Visa’s merchant agreement and bylaws. So in a nutshell, the case is about merchant rights vs. card processor rights.”

Ellen Cunningham, marketing manager for CardFellow, an online marketplace where credit card processors compete for businesses, believes the real issue is money. “Walmart claims that a customer authorizing a chip debit transaction with a signature is less secure than authorizing with a PIN. That may be true in the small set of circumstances where an authorized user is attempting to use a stolen debit card, but it’s more likely that Walmart’s problem lies with the cost of accepting the cards.”

Walmart stands to lose upwards of $42 million per year in additional fees associated with signature debit vs. PIN debit.

When a customer uses a PIN with their debit card, Walmart pays fees to the debit card network. (It does not pay money to Visa in that situation), says Cunningham. “When a customer uses their debit card and signs for the transaction, Walmart pays fees to Visa. The costs paid to Visa are a little more per transaction than the costs paid to the debit networks. Thus, Walmart wants to restrict payment methods to the lowest cost – for them, that’s PIN debit,” says Cunningham.

Steven Weisman, an attorney and author of Theft Alert, “Requiring Walmart to route payments through Visa’s network for the signature verified transaction, rather than through a competitor’s network when using a PIN increases the fees paid by Walmart for card processing by about five cents more per transaction, which adds up for a large scale company like Walmart.”

Christopher Rumpf, owner of Rumpf Computer Solutions, a restaurant and technology company focused on point of sale and payments, estimates that Walmart processes about 15 million transactions a day. “Assuming half of those debit transactions are Visa transactions, Walmart stands to lose upwards of $42 million per year in additional fees associated with signature debit vs. PIN debit.”

What does all this mean?

So Walmart stands to lose big time financially, if they don’t win the case. What are other implications of the lawsuit?

“If consumers are used to, and enjoy using signature debit transactions with their Visa debit card, a ruling in favor of Walmart in this litigation may limit the amount of retailers that allow signature debit. As a payment expert, I would never advise a consumer to use signature debit in any case where PIN debit was offered,” says Rumpf.

Another unintended consequence of a Walmart victory could be a further increase in banking fees, if Visa debit card-issuing banks lose more revenue as a result of this case

In the U.S., chip and signature is the standard versus most other countries where PIN is the standard. “Understanding the greater risk involved with signature transactions versus PIN transactions, a win for Walmart in this case could open the door to further movement to chip and PIN in the U.S. as well, which would be a win for consumers in terms of privacy and security, but a blow to the bottom line of small retailers and restaurants who would again be tasked with a heavy cash outlay to upgrade systems in order to accept chip and PIN ($2,500-$10,000 per store, plus in some cases additional staff members to handle the transactions).

Another unintended consequence of a Walmart victory could be a further increase in banking fees, if Visa debit card-issuing banks lose more revenue as a result of this case, which did happen when debit swipe fees were first capped a few years ago, points out Woolsey. Then too, “It would probably take many years to come to fruition, the subject of both swipe fees and PIN vs. signature requirements could eventually spill over into the credit card arena as well, which has thus far avoided legal or regulatory challenges since member banks completed reissuing chip-enabled credit cards last fall,” says Woolsey.

He adds a final thought, “Both claim to have the consumer’s best interest at heart, but in reality, they are primarily focused on their own rights and maximizing profits at the expense of the other. However, it’s a zero sum game between these corporate titans and the consumer is on the sidelines. Should Walmart win, any savings in their cost structure wouldn’t likely find its way to consumers in the form of lower prices – only shareholders and senior corporate executives would inevitably enjoy the spoils. If Visa wins, then it should be business as usual, or at least until the next lawsuit.”

Anonymous   |     |   Comment #1
The title is inappropriately combining the issue of chip vs magstripe with signature vs pin. Eg when I've gone abroad I've sometimes had to use my pin even for magstripe cards (and conversely this month I've used my chip card several times in France and was never asked for my pin).

The real and sole issue is that Walmart wants to use pin transactions to save on fees. The increased awareness of chip-and-pin helps to make it easier for them to push for this (previously people were told their credit card pin was just for cash advances at an atm).
Anonymous   |     |   Comment #2
The cheap and credit and debit and pin transactions are temporary, they must be connected with some biometrics or the fraud will continue as usual. 
Walmart lost more money on fraudulent cards than on pin or credit transactions last year,
this is only smoke and mirrors by Walmart.
rjm   |     |   Comment #3
I always pay with walmart gift cards and its a bit cumbersome because I have to both swipe the card and hand it to the cashier for her to scan. Or if I go to self checkout, I have to do both.

I acquired discounted walmart GCs off ebay at roughly a 10% discount including ebay bucks, portal cashback and so forth.

I don't recall being forced to sign and enter a pin anywhere.
Shocked   |     |   Comment #4
I'm shocked! Shocked! To find it's actually about something else, rather than what they say it is...

Personally, I have NO DEBIT cards -- just ATM-only cards & Credit Cards. That is by far the best situation for consumers. If there's any fraud with a debit card, you're on the hook for a lot more than with a credit card ($100 vs $50), the timeframe is worse, the fees are worse, just about everything about a debit card is bad, except that it automatically takes funds from your checking account (which you can easily do on your own, or heck, set up your account so your credit card automatically pulls from your checking at the end of the month).
Anonymous   |     |   Comment #5
I have reward checking account that only works with debit cards and I get 3.5% interest on 10K balance, not bad for few purchases per month. Nothing wrong with having debit card.
Anonymous   |     |   Comment #9
Why is an ATM the/a "best situation?"  One can still tap into the account at the bank.   What am I missing?  I only use credit cards. And, I don't have any credit card co. have access to my bank to "automatically" pull from it.  I do it the old fashion way...write a check and mail or deposit at the bank.
RJM   |     |   Comment #10
I agree that debit cards for everyday purchases are not a great idea. That said, I keep a discover cashback debit card for small purchases. (Rarely keep much money in the account)

And I have 3 reward checking accounts that I use for 34 small transactions every month.

Id imagine some people use them for simplicity.
Anonymous   |     |   Comment #6
If this is over chip debit cards, then a Walmart win would more likely mean lowering of rewards cards APY. I currently make over 1 thousand bucks per years using mine.
Anonymous   |     |   Comment #8
The battle is escalating in Canada where, "Fees applied to Visa card purchases 'remain unacceptably high,...'"
"Walmart Canada to stop accepting Visa,"
Anonymous   |     |   Comment #11
I don't shop at Walmart. No problems here. Their prices are higher than Meijers in my state. Walmart has no sales, and I can actually stack coupons at my store. A few years ago I signed up for emails from grocery bloggers and they give links to coupons for items to use for sale items on all the area stores. You can stock up on the items you use. I use only my credit card and am down to one debit card for a reward checking account.  Because you pay income tax on the interest for reward checking debit cards I now use mostly credit card deals and their rebates and their cash back are not taxed as yet. 
The highest amounts my sister and I each received in one year from credit cards, cash rewards, and rewards from opening accounts was $4650. I no longer do this. 
Anonymous   |     |   Comment #12
I can already see it coming.  Walmart is fixing to get into the credit card business and most likely they are going to have competitive reward incentives along with it.

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