What if I told you that two of America’s biggest and most profitable corporations are about to go toe-to-toe in court over credit card security and the case could actually be decided by a jury of consumers?
Recently, Walmart, the country’s largest brick-and-mortar retailer filed a lawsuit against VISA, the country’s largest credit card issuer, for requiring the retail giant to allow customers to use signatures when paying with their chip-based cards as opposed to more secure PIN numbers. And if Walmart has its way, the case will be decided by a jury of the very American consumers that are most affected by credit card fraud.
The rollout of chip-enabled cards last year came with promise of increased security and gave consumers the feeling that credit card protections in the U.S. were finally catching up with the 21st century. But while the chip-enabled cards being issued now are considerably more secure than the magnetic stripe cards they are replacing, the cards still leave Americans unnecessarily vulnerable to fraud.
New chip-based cards are effective when it comes to reducing the risk of counterfeit fraud which accounts for about 37% of fraud in the U.S. However, because card issuers chose to continue requiring signatures as a form of verification, American consumers are still vulnerable to the other common forms of fraud which account for around 59% of fraud in the U.S.
Americans account for almost half of credit card fraud globally and need the best credit card security available – chip and PIN. This technology incorporates both the chip-enabled card to counteract counterfeit fraud as well as a four-digit code for authentication – similar to that of our ATM cards – to combat “card not present” fraud like online fraud and lost/stolen credit card fraud. According to the Federal Reserve, including a PIN can make a transaction up to 700% more secure.
Over a dozen years ago, Canada, Europe, Australia and the United Kingdom all implemented chip and PIN and since have seen fraud drastically reduced – the UK saw fraud drop close to 60% after implementing the technology. The U.S. has not implemented chip and PIN and that is why it has the lion’s share of world’s credit card fraud.
Walmart’s lawsuit is the latest salvo in the ongoing battle between retailers in the transition to new chip-enabled cards and comes just weeks after Discover Financial Services Chairman and CEO David Nelms endorsed chip and PIN technology.
That fact that Discover took a position supporting chip and PIN – contrary to the payments industry’s position on the issue – and Walmart’s willingness to incur hefty legal expenses in order to better protect its customers speaks volumes about the superiority of chip and PIN as a front-line security measure to combat fraud.
Despite the overwhelming evidence and support for chip and PIN, card issuers continue to issue the less secure chip and signature cards. I have long argued that the reason card issuers are so resistant to issuing chip and PIN cards is simple – profits. Chip and PIN threatens the relative monopoly on processing “signature-based” verification for Visa and MasterCard transactions. According a recent press accounts, Visa makes about five cents more per signature transaction than it does for those transactions that involve a PIN.
To be clear, the data shows that a couple very large credit card companies profit by using an outdated credit card verification process that is more susceptible to fraud, which pushes avoidable costs to merchants. When merchant costs go up, so do consumer prices. In other words, the big credit card companies win and everyone else loses.
Consumers have taken a backseat to card issuer profit margins for years, but this latest ploy that offloads billions in fraud-related costs onto merchants while only providing consumers with half the security they need and deserve may be the last straw. It certainly seems to be for Walmart.
