Europe does debit cards better than America
On Tuesday, Walmart sued Visa. The claim? That Visa is trying to force Walmart to use a less secure payment system that happens to generate more revenue for Visa.
The conflict highlights the dismal state of American payment technology. When the United States switched to chip-based credit and debit cards last year, it became one of the last developed countries in the world to do so.
America is even further behind in the switch from signatures — which are almost useless for preventing fraud — to the four-digit personal identification numbers (PINs) that customers in many developed countries use to approve credit card transactions.
In the United States, Visa makes more money when customers use this older, less secure technology, and so Visa has insisted that retailers must continue to allow customers to make signature debit payments. Walmart cites 2009 data from the Federal Reserve showing that signature debit transactions had an average transaction fee of 1.53 percent, compared with 0.56 percent for PIN debit transactions.
Walmart is right on this one: The poor security of "signature debit" helps no one other than credit card fraudsters. Requiring customers to enter a PIN — which most debit card customers use to get money from an ATM anyway — is a sensible step. Indeed, it's so sensible that most of the world adopted it many years ago, and it's past time for America to catch up.
Visa makes more money from less secure signature debit transactions
When you take money out of an ATM, you probably enter a four-digit PIN. On the other hand, if you use the same debit card to buy something in a store, you may be asked to use a signature to verify the transaction instead.
Unfortunately, signatures are practically worthless as a security measure. If you don't believe me, try scribbling randomly next time you're asked to sign a credit or debit card receipt. I've been doing this for years and I've never had a store clerk decline the transaction because my signature didn't look authentic.
The rest of the world is way ahead of us on this. Over the past decade, the United Kingdom, Canada, and Australia — just to name a few — have switched to PIN-based authentication, in which customers identify themselves with a four- or six-digit code.
In its lawsuit, Walmart points out that Visa has been an advocate for making PIN-based authentication mandatory — in other countries. But here in the United States, Visa has resisted the change, insisting that retailers like Walmart let consumers decide whether to authenticate their purchases with a signature or a PIN.
Why? Walmart's lawsuit suggests one possible reason: When customers make a signature debit transaction with a Visa, it has to be processed by a signature debit network that's owned by Visa. On the other hand, PIN-based purchases are handled using the same financial networks the nation's ATMs use. And this is a more competitive market. Several different networks exist, and some of them are independent of the big credit card networks.
So Visa has been pressuring retailers to use a less secure payment method that happens to earn Visa a lot more in transaction fees. Walmart has been resisting this pressure. And on Monday, that conflict burst out into the open with a Walmart lawsuit.
Walmart is suing for the right to require PIN transactions
Walmart has long been obsessed with keeping costs and prices low, so it's not surprising that the retailer has been a leading advocate for switching to PIN-based debit transactions. In April 2015 — a few months before the switch to chip cards — a Walmart executive argued that it was a "joke" that the nation was switching to chips without also introducing a PIN-based system.
Walmart contrasts America with the United Kingdom, where credit card networks worked with the government on a coordinated "I ♥ PIN" campaign that launched in 2002 to promote the switch to PIN-based transactions. By 2006, "99.8 percent of chip transactions were PIN-verified," according to the Atlanta Fed.
In its lawsuit, Walmart points to the 2010 Dodd-Frank Act, which included an amendment from Sen. Dick Durbin (D-IL) guaranteeing retailers the right to route payments over the network of its choice. Walmart argues that this legislation gives it the right to require consumers to make payments with a PIN rather than a signature.
Unfortunately, the lawsuit is heavily redacted, so we don't know the details of Walmart's dispute with Visa or its precise legal argument. But it seems clear that Walmart believes Visa's efforts to promote signature debit run afoul of the Durbin amendment's guarantee of retailer autonomy.
Visa hasn't responded to my email seeking comment — and has declined to comment on the lawsuit to other media organizations — so we don't what Visa's counterarguments will be. But it looks an awful lot like Visa is pushing a less secure payment method because doing so allows it to charge merchants higher fees. In doing so, Visa is not just costing merchants — and ultimately consumers — more money, it's also making it easier for criminals to commit credit card fraud.
Walmart's lawsuit won't get us to PINs for credit card payments
If Walmart wins its lawsuit, it could provide momentum for making PINs the default for debit card transactions. That's a big deal because people make more payments with debit cards than credit cards.
Still, to fully bring the US financial system into the 21st century will require using PINs for credit cards as well. This is going to be trickier because people aren't used to remembering a PIN for their credit card (in contrast to debit cards, where people know they need a PIN to use an ATM). Banks worry that if they start pushing customers to use PINs for their credit card, customer will get annoyed and switch to another credit card.
But this is where the kind of coordinated persuasion campaign employed in Britain can be hugely valuable. If everyone starts requiring credit card PINs at the same time — especially in concert with a public campaign explaining why the switch is worthwhile — banks won't have to worry that moving first will cost them customers.
In the long run, having a PIN to make credit card and debit payments will seem as natural as using a PIN to withdraw from your ATM. The only question is how to get there.