Have retailers suddenly started developing backbones, in terms of pushing back on payments companies? On Monday (June 27), Kroger sued Visa about how it was implementing EMV, in much the same way that Walmart and Home Depot have done. This follows Walmart kicking Visa out of Canada and a major German company rejecting PayPal after PayPal apologized and reinstated it. Did somebody spike the NRF water fountains with super-caffeine or something? Or have merchants decided that they can push back on payments giants with little risk of meaningful pain?
EMV rules seems to have been the PIN straw that broke the POS camel’s back, as even Apple Pay has suffered performance degradations following EMV migrations. The big picture arguments about security—that it’s blindingly obvious that PIN is far more secure than signature—are obscured by the reality that this is really a fight about interchange fees. And the EMV argument that the path to PIN must be glacially slow or else American consumers will freak out from the change, despite the fact that most are quite used to PINs from ATMs and debit cards, is frighteningly valid.
And here it is in the land of EMV rules that grocery giant Kroger makes it stand. According to that lawsuit—here’s the full text if you want to peruse it—the problem is in the way Visa has ushered EMV into the U.S., with its insistence on signature and refusal to allow merchants to use PIN. The lawsuit points to October’s liability shift deadline and said that Kroger purchased and rolled out 54,000 new card readers to accommodate the deadline.
“Kroger enabled its routing options by configuring its POS chip terminals to use a software specification that allowed for routing to multiple networks and to require cardholders to input their personal identification numbers in the terminal to verify the card,” the filing said. “Requiring a PIN increased Kroger’s routing options for debit card transactions and made them more secure than using the cardholder’s signature, which can be easily forged.”
Actually, thieves today—especially at grocery stores like Kroger—need not worry about forging signatures as store associates haven’t meaningfully checked such signatures for well more than a decade. Indeed, “meaningfully” may be a stretch, as it would certainly involving handwriting-recognition training, but few stores ask associates to even look at the signature, making forgery irrelevant.
Before Kroger made the PIN POS move, the filing said, Visa approved the move. The lawsuit then eloquently described what happened next, from Kroger’s viewpoint.
“In a sudden and drastic change of direction seemingly motivated by an intention to restrain competition, after Kroger rolled out its new chip-enabled POS terminals nationwide, Visa informed Kroger that its terminal configuration did not comply with Visa’s rules. MasterCard, the other branded debit network, did not object to the configuration in Kroger’s POS terminals, which treated MasterCard debit transactions the same way as Visa debit transactions. Visa maintained that its rules trumped federal law and its prior approval of Kroger’s chip terminal configuration did not matter. Visa demanded that Kroger re-configure its terminals to remove the required and more secure PIN verification and to use a Visa ‘application identifier’ (known as an ‘AID’) that would force a given Visa debit transaction to be routed to Visa for processing, regardless of whether the cardholder used PIN or signature to verify the card,” the lawsuit said. “Visa threatened that if Kroger did not make these system-wide changes, and do so quickly, then Visa would fine Kroger for not complying with Visa’s rules. Kroger tried to convince Visa in correspondence, telephone calls, and in-person meetings that Visa’s approach was misguided and wrong. Kroger took the principled position that what it was doing at the POS with Visa debit cards was supported by federal law and Visa’s efforts to inhibit Kroger’s routing ability was not, made the transaction more secure, and had been approved by Visa before Kroger rolled out its new chip-enabled POS terminals system-wide.”
It’s pleasing that Kroger described its own position as “principled.”
“When Kroger would not give in to Visa’s threats, Visa initially started fining Kroger, and then ramped up the fines and pressure on Kroger to do what Visa demanded with still more heavy-handed punishment,” the lawsuit said.
Those fines hit $7 million—Kroger said, without explanation, that it has only thus far paid $3.1 million—and that Visa suspended the interchange pricing agreement between Kroger and Visa and threatened to halt all Visa transactions. Although it’s clear that any card brand can choose who it works with and that they can always stop a retailer’s ability to accept their branded cards, Visa seems comfortable these days dropping this threat easily. To quote Paul Newman from The Sting, “If they don’t do that, you know you’re not getting to them.”
To try and demonstrate the pain implied with that threat, Kroger offered up some numbers: “In 2015, there were approximately $29 billion in Visa debit card transactions at Kroger, including about $10 billion Visa signature debit transactions and about $19 billion Visa PIN debit transactions. There is no rational basis for Visa to cut off Kroger’s ability to accept any or all Visa debit cards unless Visa intended to punish Kroger. Doing so threatened catastrophic consequences for Kroger’s business, including turmoil at the check stand as Kroger customers were unable to pay, and the loss of Kroger customers who insisted on using a Visa debit card to pay and thus went elsewhere to shop.”
This is all a calculated negotiating bit of fun. Visa would feel no shortage of pain itself if it forced Kroger customers to use MasterCard or Amex. Depending on the neighborhood, most shoppers would feel more loyalty to their local grocery store than to a card brand. For many, the card brand on the card—especially when it comes to Visa and MasterCard—is trivial and they will simply accept whatever card their bank sends them. Granted, that’s a hassle and Kroger would indeed feel a loss, but both sides would have pain. That’s why it’s a threat rarely acted out.
“Visa demanded that Kroger re-configure its terminals to function with the Visa AID and to include a POS screen asking the cardholder to select between the ‘Visa’s AID’ and a generic ‘US Common Debit AID,’ as if cardholders would even understand what this means. This would allow routing to other debit networks. If a Visa cardholder selected the ‘Visa AID,’ then Kroger had no choice but to route the transaction to Visa. Kroger’s software vendor informed Visa that, at present, it was unable to re-program Kroger’s terminals in this way, but when it develops that capability, Visa has signaled that it expects Kroger to display the ‘Visa AID’ versus ‘US Common Debit AID’ on its terminal screens.”
Kroger said it was worked out an arrangement with Visa and began implementing POS, but “part way through this process, Visa changed its position again and informed Kroger that the POS terminal changes it was making were still not compliant with Visa’s demands.” And then: “In a telephone call on June 17, 2016, Kroger’s Senior Director, Enterprise Payments & Store Support asked Visa’s Vice President, Head of Visa Rules Management, what more did Kroger have to do to avoid these further fines and threats. Visa responded that it would remove the fines and limited acceptance threat if, in addition to the POS changes that Kroger was rolling out, Kroger stopped using third party debit networks to process Visa signature debit transactions and used only Visa to process these transactions.”
Then the latest: “”Kroger complied with this additional Visa demand, like the others, under duress. On June 20, 2016, Kroger instructed Visa’s acquirer, Vantiv, to stop routing Visa signature debit transactions to third party debit networks. On June 21, 2016, Vantiv confirmed to Kroger that it had stopped doing so. This lawsuit follows.”
And their point? Do you fault a tiger for acting like a tiger? Kroger has dealt with Visa a very long time and it is suggesting that this behavior was somehow new or surprising? To most merchants dealing with Visa, this summary of the negotiations is just another day at the office with Visa.