U.S. Merchants Win Right to Sue Card Networks Over EMV Implementation

A federal judge in a California court granted Florida merchants the opportunity to sue credit card giants Visa, Mastercard, American Express and Discover over antitrust allegations and poor practices surrounding EMV in the United States.

Florida merchants won the right to take credit card processing giants Mastercard, Visa, American Express and Discover to court over antitrust allegations and the mishandling of EMV-migration in the United States. A California federal judge granted the order after denying the networks’ motion to dismiss this past Friday. The merchants are still awaiting a motion to be granted class action status, which would allow them to include over eight million other small businesses in the lawsuit.

The court’s decision comes a year after the much-talked-about EMV deadline. Beginning October 1st of last year, any business without the capability of accepting chip payments became responsible for all fraudulent charges made at their establishment. Prior to that date, banks took on all the liability for purchases made with counterfeit credit cards. The liability shift served as a means to incentivize businesses to upgrade their payment terminals to and begin moving customers away from the old magnetic stripe payments.

Merchants argue that the change in liability, and the costs involved, differed greatly from the way these transitions worked in other parts of the world. Robbins Geller Rudman & Dowd LLP, the counsel for the plaintiffs, released a statement saying “elsewhere [EMV implementation] was typically staggered and made with various accommodations to merchants such as reduced interchange fees and additional time to adopt the EMV technology.” The plaintiffs contend that U.S. merchants were made to "shoulder the costs of certain chargebacks that had for years been the responsibility of the financial behemoths."

Another major area of concern for merchants is the fact that the type of EMV incorporated into U.S. credit cards is not as secure as it could have been. Most credit cards issued in the country rely on technology that requires a signature as a form of authentication, sometimes referred to as Chip & Signature. Throughout the rest of the world, PIN-based EMV cards are gaining popularity due to their increased security benefits. In fact, after first rolling out Chip & Signature cards in the late 2000’s, Australian merchants were forced to adapt to Chip & Pin just a few years later. U.S. Merchants worry that the half-measure carried out in the country will result in another costly update down the line.

A map showing countries countries where Chip & Signature and Chip & Pin credit cards are more widely accepted.

Merchants' sentiments about the shift appear to be in direct contrast to what's been expressed by Visa and Mastercard. In an earnings call with investors, Charles Scharf, CEO of Visa, said the company is “making policy changes to help limit exposure to counterfeit fraud liability for merchants who are not yet chip-ready.” Visa also talked of streamlining the migration process to help simplify the certification process. These backlogs may have potentially prevented some merchants from being compliant, and potentially caused them to fork the bill for fraud charges. Senator Dick Durbin has formally asked the Federal Trade Commission to investigate the matter earlier this year.

American consumers have also expressed grievances over the increased time EMV transactions take, when compared to the old magnetic strip cards. Cayan, a payment processing company, estimated that EMV will add approximately 116 million hours to checkout lines this upcoming year. That comes out to roughly 5.5 hours per consumer. Roughly 87% of consumers surveyed by Square, another payment processor, reported being frustrated with the longer lines caused by EMV.

VISA and Mastercard are already battling merchant organizations in the courts over a separate matter. Industry giants like Wal-Mart, Macy’s Inc. and Home Depot Inc. have brought forth allegations of abuses and price-fixing surrounding interchange fees. All merchants who accept credit card payments in the United States must pay a portion of each sale to the network involved. Currently, the average fee stands at around 2%. This is significantly higher than the interchange rates in other parts of the world, like Europe and Australia. In June of this year, the federal appeals court panel dismissed a $7.25 billion settlement offered by Visa and Mastercard. The settlement proposal stipulated that merchants were to never again take two companies to court over these fees. This was viewed as a major reason behind the settlement being dismissed.

Joe Resendiz

Joe Resendiz is a former investment banking analyst for Goldman Sachs, where he covered public sector and infrastructure financing. During his time on Wall Street, Joe worked closely with the debt capital markets team, which allowed him to gain unique insights into the credit market. Joe is currently a research analyst who covers credit cards and the payments industry. He earned a bachelor’s degree from the University of Texas at Austin, where he majored in finance.

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