Walmart is suing Visa (WMT, V)

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One of the largest retailers in the world is suing one of the largest financial companies in the world.

Walmart has filed a lawsuit against Visa regarding the latter's policy about how customers verify their debit card purchases at the point-of-sale (POS), according to the Wall Street Journal.

When someone uses a chip debit card, they can either enter a PIN number or sign their names. Walmart wants to mandate the use of PINs, but Visa requires that Walmart present shoppers with both options, which led to the lawsuit. Bear in mind that this lawsuit is one of many between the two companies regarding card acceptance and authentication.

Walmart wants only PINs primarily because of cost. Card networks such as Visa profit from swipe fees that they charge merchants for each transaction, and Visa reportedly charges Walmart five cents more for signature authentication than PIN ones. By forcing Walmart to offer both, it makes more money.

This is especially important because approximately 10% of Walmart's debit users, who represent 70% of the retailer's card payments, authenticate with signatures, most likely because it's easier than remembering and entering a PIN.

Another factor is security. Most nations that use EMV verify exclusively through PIN, but U.S. customers are used to signatures, so many banks offer both. PIN, however, is more secure because signatures can be forged. Walmart, therefore, would want to mandate PIN authentication because it would reduce fraud losses.

This situation is part of a broader trend in the industry in which cardholders prefer to not use PIN authentication. In 2015, only 40% of users authenticated purchases with a PIN, while 60% either did not or were unsure.

If card networks and banks continue to offer signature authentication, then the risk of forgery could offset some of the numerous fraud protection benefits that EMV cards provide at the point of sale.

Fraud cost U.S. retailers approximately $32 billion in 2014, up from $23 billion just one year earlier. To solve the card fraud problem across in-store, online, and mobile payments, payment companies and merchants are implementing new payment protocols that could finally help mitigate fraud.

John Heggestuen, senior research analyst for BI Intelligence, Business Insider's premium research service, has compiled a detailed report on payment security that looks at how the dynamics of fraud are shifting across in-store and online channels and explains the top new types of security that are gaining traction across each of these channels, including on Apple Pay.

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Here are some of the key takeaways from the report:

• EMV cards are being rolled out with an embedded microchip for added security. The microchip carries out real-time risk assessments on a person's card purchase activity based on the card user's profile. The chip also generates dynamic cryptograms when the card is inserted into a payment terminal. Because these cryptograms change with every purchase, it makes it difficult for fraudsters to make counterfeit cards that can be used for in-store transactions.
• To bolster security throughout the payments chain encryption of payments data is being widely implemented. Encryption degrades valuable data by using an algorithm to translate card numbers into new values. This makes it difficult for fraudsters to harvest the payments data for use in future transactions.
• Point-to-point encryption is the most tightly defined form of payments encryption. In this scheme, sensitive payment data is encrypted from the point of capture at the payments terminal all the way through to the gateway or acquirer. This makes it much more difficult for fraudsters to harvest usable data from transactions in stores and online.
• Tokenization increases the security of transactions made online and in stores. Tokenization schemes assign a random value to payment data, making it effectively impossible for hackers to access the sensitive data from the token itself. Tokens are often "multiuse," meaning merchants don't have to force consumers to re-enter their payment details. Apple Pay uses an emerging form of tokenization.
• 3D Secure is an imperfect answer to user authentication online. One difficulty in fighting online fraud is that it is hard to tell whether the person using card data is actually the cardholder. 3D Secure adds a level of user authentication by requiring the customer to enter a passcode or biometric data in addition to payment data to complete a transaction online. Merchants who implement 3D Secure risk higher shopping-cart abandonment.

In full, the report:

• Assesses the fraud cost to US retailers and how that fraud is expected to shift in coming years
• Provides 5 high-level explanations of the top payment security protocols
• Includes 7 infographics illustrating what the transaction flow looks like when each type of security is implemented.
• Analyzes the strengths and weakness of each payment security protocol and the reasons why particular protocols are being put in place at different types of merchants.

To get your copy of this invaluable guide, choose one of these options:

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The choice is yours. But however you decide to acquire this report, you’ve given yourself a powerful advantage in your understanding of payments security.