Update - in November 2017, Walmart and Visa announced that they are settling the lawsuits. Details of the settlement have not been made public, though Visa made a public announcement that they're pleased with the settlement decision. We're leaving the rest of this article for historical purposes.
Setting the Stage: PIN vs. Signature
The lawsuit focuses on Visa debit cards. Traditional magnetic strip Visa debit cards can be authorized with a PIN or with a signature. When a debit card is authorized by a customer entering their PIN, the transaction is processed on a PIN debit network. Visa does not make money on PIN debit transactions, even if it’s a Visa branded debit card. When a debit card is authorized by a customer signing their name, the transaction is processed on Visa’s credit card network. (This is somewhat misleadingly referred to as running the debit card “as credit” even though a debit card is never truly a credit card.) Visa makes money on signature debit transactions made with a Visa branded debit card.Chip Cards Arrive
When the United States began switching to chip cards, there was a lot of discussion over whether to issue chip and PIN or chip and signature. For credit cards, chip and signature largely won out while new debit cards are chip and PIN. Chip debit cards can be authorized with a PIN or with a signature, same as traditional magnetic strip cards.What Visa Wants
Visa has always insisted that customers have a choice for how to authorize debit transactions. You can choose to enter your PIN, or you can choose to run it “as credit” by signing for it. As I mentioned in the first section, Visa only makes money on Visa debit transactions if they’re authorized with a signature. Visa wants to allow customers to choose how to authorize their transactions, while also ensuring that it at least has the possibility of making money from debit transactions. Visa requires the retailer to let customers choose in its contract with Walmart. According to the Wall Street Journal, Walmart has previously required PIN authorization and prohibited signature but reversed the decision when Visa cited the terms of its contract. In November 2016, Visa announced that it had updated the debit choices, allowing merchants the use of what's known as a common application identifier (AID) instead of a global application identifier. The common AID can access more than a dozen PIN debit networks, providing the freedom of choice required by the Durbin amendment, which specifies businesses must have at least 2 options for PIN debit networks. The choice of a debit network is supposed to be left to the merchant, not to customers. Previously, some systems were set so that the customer had the choice with the global AID. The change has satisfied the FTC, which sent Visa a letter stating it was concluding its investigation according, to Digital Transactions.Visa's Countersuit
At the original publication of this article, only Walmart had filed a lawsuit. Now, Visa has filed a countersuit, alleging contract fraud against Walmart. The card company says that Walmart entered into a contract with Visa while having no intention of honoring the terms of the contract. Specifically, Visa says that it was clear it the contract (which went into effect January 1, 2016) that Walmart could not require PIN only as a method of debit card authorization. Visa alleges that Walmart immediately disregarded that provision.What Walmart Wants
Walmart does not want to allow signature authorization. It wants to be able to restrict customers’ authorization method to PIN only, as it did previously. The official reasoning according to Walmart is that PINs are more secure, but undoubtedly costs are a factor as well. Various media outlets have stated that it costs Walmart 5 cents more per transaction when customers authorize their debit purchases with signature rather than PIN. Note that just because it costs Walmart more for signature debit doesn’t mean that’s universally the case for all businesses. If you run a business, be sure to check out PIN debit vs. Signature Debit for more information on which is cheaper for your business. In any case, Walmart is not focusing as much on cost in its statements about the lawsuit, instead pushing their interest in protecting customers and claiming that Visa is forcing the use of “fraud-prone” signature authorization.But aren’t chip cards just as unsecure as magstripe if you don’t use a PIN?
No; chip cards used in-store are still more secure than magnetic strip cards regardless of whether they’re authorized with a PIN or with a signature. There’s a common misconception that chip cards authorized with a signature are no more secure than the old magstripe cards. While some experts think that PINs are the most secure method possible, you’ll still get security benefits from a chip card that are not possible with a magstripe card.I heard Visa makes more money from signature than PIN, is that true?
Yes, but not in the way you might think. Visa makes nothing from PIN debit, so it obviously makes more from signature debit. But more than “nothing” isn’t hard to accomplish. It’s not necessarily a case of Visa being greedy, which is how some publications have portrayed it. It’s a confusing point because it’s true that Walmart may pay more, but it’s to 2 different entities. The way some publications have portrayed the situation is that Visa makes 5 cents more per transaction if it’s a signature debit transaction, implying that if it’s a PIN debit transaction, they make money but 5 cents less than they otherwise would. It doesn’t work like that. If a PIN debit transaction costs Walmart 10 cents and a signature debit costs them 15 cents, Visa either makes 0 or 15 cents. At no point does Visa as a credit card brand get money from the PIN debit transaction.Meanwhile, in Canada...
Walmart Canada is also battling Visa, although rather than go to court, the company has announced that it will stop taking Visa cards at its stores beginning in mid-July 2016. As of July 18th, Walmart began refusing Visa cards at select stores in Ontario. In September 2016, the company announced that it would no longer accept Visa cards in stores in the province of Manitobia as of October 24th. Walmart may continue to rollout the ban to more stores over the coming months. Visa has slammed Walmart publicly, saying the company is dragging customers into a private contract dispute. As of summer 2016, it's a wait and see on whether Walmart Canada and Visa will reach an agreement. Sources report that Visa has launched a marketing campaign in locations where Walmart has stopped accepting its cards, so we may be in for a long battle. Update: Walmart and Visa both announced that Walmart Canada stores would once again accept Visa cards as of January 6, 2017. No further details were provided by either company on terms of the agreement.So Who’s Right?
A case can certainly be made that processing is too expensive and that Visa is part of that problem. But in this particular situation, it seems like Walmart wants to have its cake and eat it, too. The company expects Visa to allow it to accept Visa debit cards while simultaneously preventing Visa from making money off of those debit card transactions. Additionally, Walmart has a contract with Visa that stipulates customers must be able to choose between signature or PIN; a contract that Walmart entered into freely only to break it last year until Visa caught on. We’ll have to wait to see how the lawsuit pans out, but my money’s on Visa. What do you think? Are you Team Walmart or Team Visa?
Ben Dwyer
Ben Dwyer began his career in the processing industry in 2003 on the sales floor for a Connecticut‐based processor. As he learned more about the inner‐workings of the industry, rampant unethical practices, and lack of assistance available to businesses, he cut ties with his employer and started a blog where he could post accurate information about credit card processing. As the blog gained in popularity, Ben began directly assisting merchants in their search for a processor. Ben believes in empowering businesses by providing access to fair, competitive pricing, accurate information, and continued support. His dedication to transparency and education has made CardFellow a staunch small business advocate in the credit card processing industry.
