Why is nothing ever as simple as it looks?
As you have probably noticed, a LOT of retailers have not migrated to chip card readers for accepting credit cards. As of last October, the liability for fraudulent transactions for those merchants who have not migrated (like Wendy’s, for example) is now the store’s and not the banks.
Some merchants are not real happy about this and two law firms have filed a lawsuit against the credit card brands claiming anti trust issues.
I have been saying that the merchants are just whining – that they knew this was coming since 2011 and that is true. Sort of.
The 6 credit card brands (Visa, Mastercard, Discover, Amex, JCB, and UnionPay) set up an entity called EMVCo to set the standards for chip card technology, software, networking and integration. While some merchants have had input into the process, for the most part, it has been a black hole.
Then there is an issue of cost. For small merchants, they often have a standalone credit card terminal. For those businesses, the costs are pretty minimal. A few hundred dollars and they are likely good to go. But what about those companies who’s point of sale system (POS) tracks and processes their credit card transactions? Well that is a different story. If you bought the software and own the PC it runs on, you likely have to go out and buy a completely new system unless you have been paying annual maintenance fees to the software vendor. And even then, the vendor might say this is not a free upgrade. And you still have to configure it. Finally, it has to be certified (more about that in a minute).
For large companies (like, say, Wendy’s), they might have to buy 10,000-50,000 new terminals or more. And someone has to configure and install them and train the users and the managers. That is likely not a small bill.
Next comes certification. EMVCo requires that your system has to be certified and right now, the few companies that are authorized to certify you are backlogged 6-12 months. So even if you spend the money, install the hardware, configure the software and train your users, you may still have to wait 6-12 months before you can use it.
So if the stores knew about this in 2011-2012, why did they wait until now to do something. Well, a few, like Walmart, did not. For many, it boils down to time and money. But, there is another wrinkle.
That wrinkle has a name and that name is Dick Durbin. Yes, the senior Senator from Illinois. During the economic meltdown of 2008-2010, Durbin championed and something now known as the Durbin Amendment, which became part of Dodd-Frank. As with many good intentions, the idea was to reduce costs to merchants by limiting debit card fees. Not credit card fees, just debit card fees paid by merchants. It also required banks to give merchants choices to process their debit card transactions.
Unfortunately, the chip technology in use was not designed to handle choices and the technical solution did not get sorted out until 2014. Merchants did not want to move forward to accept chip credit cards (for which the terminals worked) only to have to go back and change everything again when they got the debit card part figured out, so they just waited. So instead of having 4 years to deploy all this new technology, they had like 18 months.
I still think industry could have handled it better, but I am not particularly surprised that they did not.
And of course, the government, in the form of the Durbin Amendment, didn’t help.
And, as we all know, they are from the government and they are here to help us. Too bad they didn’t “Just Say No!”.
The liability shift, I think, is a good thing. Absent that, we would continue to trail the entire civilized world and continue to use mag stripe cards and experience fraud to the tune of $10-$20 billion a year.
Whether this lawsuit goes anywhere or not, the chip card train has left the station. Probably the credit card brands will settle, the lawyers will make a lot of money and the merchants will be left holding the bag. But, sooner rather than later, we will have completed the migration.
Kind of like the $6 billion Mastercard/Visa settlement that lets merchants charge an extra fee for credit cards. That used to be a violation of the merchant agreement. Well first, the judge has not approved that agreement and won’t for a year or more and second, there are interesting complications that won’t actually allow many merchants to charge more even if they want to – but that is a story for a separate blog post.
Still, I now have a better appreciation for the merchant’s problem – which is good.
Information on EMVCo can be found here.
Information on the liability shift can be found here.
Information on the lawsuit can be found here.
Information on the brand by brand timeline can be found here.