Wal-Mart Sues The Crooks Known As Visa Inc. For $5 Billion Over Excessive "Swipe Fees"
Retailers are charged fees set by Visa and other card networks every time a customer pays with a credit or debit card. In its suit, Wal-Mart alleges that the way Visa set those "swipe fees" violated antitrust regulations and generated more than $350 billion for card issuers over nine years, in part at the expense of the retailer and its customers.
Visa declined to comment. The company has repeatedly denied that its fees are anticompetitive.
The lawsuit, filed this week in the U.S. District Court for the Western District of Arkansas, extends a long-running battle between the retailer and the payments network. Wal-Mart helped win a $3 billion class-action settlement with Visa and MasterCard Inc. in 2003 over the card networks' requirement that merchants who accepted their credit cards must also accept their debit cards.
Interchange fees, the industry term for card-swipe fees, have been another major point of contention between the two camps. The fees are set by Visa and other card networks and collected by card-issuing banks like J.P. Morgan Chase and Co. Retailers have argued that the fees had been set too high due to a lack of competition with the two payment industry giants.
Smaller retailers settled over the issue in July 2012, but dozens of large merchants including Wal-Mart, Target Corp. and Macy's Inc. opted out so they could pursue suits of their own—hence the suit filed this week.
Interchange fees, the industry term for card-swipe fees, have been another major point of contention between the two camps. The fees are set by Visa and other card networks and collected by card-issuing banks like J.P. Morgan Chase and Co. Retailers have argued that the fees had been set too high due to a lack of competition with the two payment industry giants.
Smaller retailers settled over the issue in July 2012, but dozens of large merchants including Wal-Mart, Target Corp. and Macy's Inc. opted out so they could pursue suits of their own—hence the suit filed this week.
Companies that opted out of the settlement have argued that the deal wouldn't prohibit card networks from raising card-processing fees later on and would require merchants to waive their rights to sue payment networks on all current or future payment methods, ranging from credit cards to mobile phones.
The settlement received final approval by a federal judge in December, though several retailers have appealed. It is aimed at ending more than 50 lawsuits filed against the card networks and large banks that issue cards since 2005. Under the settlement, merchants stand to receive about $5.7 billion.
Wal-Mart used the lawsuit filed this week to throw in a laundry list of complaints against Visa, including claims that the high fees imposed by the payment network caused the retailer to lose sales.
"The anticompetitive conduct of Visa and the banks forced Wal-Mart to raise retail prices paid by its customers and/or reduce retail services provided to its customers as a means of offsetting some of the artificially inflated Interchange Fees," the company said. "As a result, Wal-Mart's retail sales were below what they would have been otherwise."
The settlement received final approval by a federal judge in December, though several retailers have appealed. It is aimed at ending more than 50 lawsuits filed against the card networks and large banks that issue cards since 2005. Under the settlement, merchants stand to receive about $5.7 billion.
Wal-Mart used the lawsuit filed this week to throw in a laundry list of complaints against Visa, including claims that the high fees imposed by the payment network caused the retailer to lose sales.
"The anticompetitive conduct of Visa and the banks forced Wal-Mart to raise retail prices paid by its customers and/or reduce retail services provided to its customers as a means of offsetting some of the artificially inflated Interchange Fees," the company said. "As a result, Wal-Mart's retail sales were below what they would have been otherwise."
Wal-Mart also took a shot against Visa over payment card security. Data breaches last year at Target Corp., Neiman Marcus and others have drawn attention to the country's slow adoption of card technology that uses computer chips and PIN numbers and is seen as less susceptible to fraud than the current system of magnetic stripes.
"Wal-Mart was further harmed by anti-innovation conduct on the part of Visa and the banks, such as perpetuating the use of fraud-prone magnetic stripe system in the U.S. and the continued use of signature authentication despite knowledge that PIN authentication is more secure, a fact Visa has acknowledged repeatedly," it said in the suit.
"Wal-Mart was further harmed by anti-innovation conduct on the part of Visa and the banks, such as perpetuating the use of fraud-prone magnetic stripe system in the U.S. and the continued use of signature authentication despite knowledge that PIN authentication is more secure, a fact Visa has acknowledged repeatedly," it said in the suit.
Visa and MasterCard have been pushing merchants and banks to adopt the technology, arguing it could significantly reduce the impact of data breaches. Both companies have set an October 2015 deadline for merchants to upgrade to the technology or face increased liability for future data breaches.
Some banking groups have previously accused merchants of dragging their feet on adopting the technology.
U.S. retailers are not ready to support the 2015 transition to new credit and debit card technology intended to reduce payment fraud because the return on investment isn’t clear, says Tom Litchford, vice president of retail technologies at the National Retail Federation. He said CIOs must weigh whether the costs to upgrade their payment systems are greater than the financial costs associated with fraud.
That business calculus isn’t clear because the cost of replacing existing systems is greater than the liability for fraud. The NRF estimates that it would cost U.S. retailers $35 billion in hardware, software and training to support a new standard for cards secured with smart chips and PIN technology. In contrast, credit card fraud costs U.S. retailers and financial services firms about $5.5 billion a year, he said.
“What’s the ROI? [return on investment,]” said Mr. Litchford, who also heads the lobby group’s CIO council. “Retailers have to make their own business decision around the timeframe” to upgrade, he said.
Payment system security has become heavily scrutinized in the wake of highly publicized data breaches at Target Corp. and other retailers. Politicians and lobbyists have seized upon the opportunity to call for improved security. In October 2015, card issuers will replace the magnetic strip found in credit and debit cards with a smart chip that stores customer data and retailers will be on the hook to support the technology. Many countries already use this technology, based on the Europay, MasterCard and Visa, or EMV standard, and usually also require consumers to use a PIN.
The NRF agrees chip cards used in concert with PIN technologies are a security improvement over current magnetic strip systems. But Mr. Litchford said retailers will upgrade to chip and PIN technologies at their own pace, once banks issue consumers EMV-compliant cards. He said general merchandise retailers selling big-ticket items may upgrade to PIN and chip systems because they stand to lose more money from credit card fraud. But he said fast-food restaurants, where entering a PIN number may introduce more friction than is necessary for such a low-margin business, may wait a bit longer. In the meantime, he said retailers can protect payment data through encryption, or tokenization, which substitutes a card’s account number with random alphanumeric sequences.
Only about 18% of U.S. retail payment terminals can support smart cards for processing payments. But that number may accelerate as retailers prepare for when the burden for accepting financial losses from fraudulent transactions shifts to those who do not use smart chip technology.
Today, merchants typically cover one-third of fraud, with card issuers paying two-thirds of the cost. But beginning October 2015, if a retailer installs a point-of-sale system compliant with the EMV smart chip standard, and a counterfeit card that only supports the current “swipe and pay” cards is presented for payment, the card issuer is responsible for the fraudulent charges. Conversely, if an EMV-compliant card is presented at a POS system that is not EMV compliant, and a fraudulent transaction occurs, the retailer is liable.
Lee Jurgens, chairman of the board for the Merchant Advisory Group advocacy, said fraud is going to rise among retailers who don’t have chip and PIN in place.
But Mr. Litchford said upgrading systems to support EMV is a tough call for retailers. He said CIOs are already tasked with integrating physical and digital retail systems, using analytics to make better product decisions, and trying to find “data scientists” qualified to make sense of purchase and fashion data.
Another major reason why the industry has moved so slowly to upgrade payment systems was on display earlier this month. Visa Inc. and MasterCard Inc. said they are forming a new group advocating the use of chip technology in credit and debit cards, but did not recommend the use of PINs.
The reason? Although MasterCard is comfortable with PIN technology, Visa believes PIN technology is not the ultimate solution.
The largest U.S. retail trade group says new card technology proposed by a consortium of credit card issuers doesn’t go far enough to prevent credit card fraud.
Visa Inc. and MasterCard Inc. Friday advocated the use of chip technology in credit and debit cards, but did not recommend the use of personal identification numbers as additional layer of security protection for payments. The two payments processors Friday said they are forming a new group to speed up the adoption of technology aimed at improving credit- and debit-card security in the wake of several high-profile data breaches. Visa and MasterCard disagree on the use of PIN technology in conjunction with chips.
But National Retail Federation, which represents 12,000 retailers in the U.S., says implementing chip technology but not PIN is like installing an alarm on the front door of a home while leaving the back door open. “PINs can take away the vast majority of the card fraud,” Mallory Duncan, the NRF’s general counsel, told CIO Journal. He said it is “remarkable” to want “to stick with signature and the promise of something in the future, rather than put on safe PINs.”
In chip technology the magnetic strip found in credit and debit cards is replaced by a smart chip that stores customer data. Many countries already use this technology, and usually also require consumers to use a PIN.
The NRF said credit card fraud cost retailers and financial services companies more than $11 billion in 2012.
Despite this, U.S. banks and retailers have dragged their feet on implementing new payment systems because it requires significant investments in new payment technologies. The NRF had said it could cost the U.S. retail industry $30 billion in technology and training to upgrade to chip-based cards. Also, adding additional security can slow down payment processing systems; retailers are loath to make consumers wait longer in the check-out lines.
The Target hack “served as a catalyst” for collaboration between the retail and financial services on payment security, Visa President Ryan McInerney said in a statement. But the principals are still not quite ready to collaborate. Ellen Richey, chief enterprise risk officer of Visa, tells CIO Journal that adopting the NRF suggestion for a chip and PIN security system could limit efforts at adopting better security options down the road. “We believe that PIN is probably not the ultimate solution,” Ms. Richey said.
But MasterCard spokesman Seth Eisen said pairing PIN with chip technology is a “secure way to conduct a transaction.” He said MasterCard offers merchants and card issuers the flexibility to choose whether to implement chip and PIN or chip and signature systems.
Denée Carrington, a Forrester Research Inc. business analyst, noted that chip and PIN technology is already used in many countries. Rolling out a chip-only approach could end up being costly if the parties decide to implent PIN security somewhere down the line. “Many merchants won’t want to reinvest and retrain a second time to upgrade,” she said.
Today, merchants typically cover one-third of fraud, with card issuers paying two-thirds of the cost. Under this regime, if a retailer installs a PIN and chip-compliant point of sale system, and a counterfeit card that only supports the magnetic stripe system is presented for payment, the card issuer is responsible to cover the fraudulent charges. Conversely, if a PIN and chip card is presented at a sales system that does not support the technology, and a fraudulent transaction occurs, the retailer is liable for the damage. “Fraud is going to get a lot worse, so they have to make the investment now,” said Randy Vanderhoof, a payment industry expert.
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