Visa’s Counterclaim in Debit Dispute Accuses Wal-Mart of Contract Fraud

Visa Inc. on Wednesday filed a counterclaim against Wal-Mart Stores Inc. alleging that the retailer’s May lawsuit against the network is not an issue involving violations of federal regulations regarding debit cards, as Wal-Mart cast it, but a contract dispute. Visa says Wal-Mart “fraudulently induced” it to sign an acceptance contract last November but “in bad faith” went on to violate its terms that required Wal-Mart to give customers a choice to sign for purchases with Visa debit cards.

Bentonville, Ark.-based Wal-Mart is a long-time supporter of PIN authentication, saying it has lower fraud rates than signature debit and costs the company less to accept. In its suit, Wal-Mart accused Visa of trying to limit its PIN-debit transaction-routing options afforded under the Durbin Amendment to 2010’s Dodd-Frank Act, particularly as it rolled out new terminals to accept EMV chip cards.

But in a document filed Wednesday in a New York State court that answers Wal-Mart’s complaint and contains its counterclaim, Visa says the dispute has nothing to do with government regulations.

“That is wrong,” Visa says. “The parties’ dispute arises under a contract, and it is in that contract that the relevant provisions governing the parties’ relationship are to be found.”

The companies “intensely negotiated” a new acceptance agreement beginning in 2013 and finally signed it Nov. 13, 2015, with an effective date of Jan. 1, 2016. “Visa ultimately accepted some of the terms Walmart sought, and rejected others,” Visa says.

According to the filing, “Among the terms that Walmart sought and Visa expressly rejected was a right to require Visa cardholders to enter a PIN when they used their Visa-branded debit cards to make payments at terminals in Walmart stores. Visa’s cardholders had long had the choice at Walmart’s terminals—a choice required by Visa’s rules—to provide either a signature or a PIN when they used their debit cards. Eliminating the cardholder’s option to provide a signature, and foreclosing other possible means of verification in the future, would infringe on the consumer’s choice, reduce the consumer’s ability to conduct a transaction over the Visa network, tarnish Visa’s brand, and, in many cases, lead to non-acceptance of Visa debit cards.

But, despite the new contract, Wal-Mart quickly began testing PIN-only options late in 2015 and in February of this year rolled out such a policy nationally through its new EMV terminals, the counterclaim says. Screen prompts that had appeared when a Visa debit card user elected to cancel an otherwise PIN-based sale and be led to prompts that would enable her to sign for the purchase no longer appeared, according to Visa.

“Instead, the following message would be displayed on the terminal: “Card declined. Use a different card or pay with cash. Tender declined reason: CUSTOMER CANCELLED BANKCARD,” says the counterclaim.

Visa calls the policy “a material breach” of the contract and a violation of its honor-all-cards and consumer-choice rules.

Wal-Mart allegedly did not disclose this new policy to Visa, which said it learned of it when it began receiving reports from consumers that they could no longer use their Visa debit cards at Wal-Mart stores without entering a PIN. Visa also said it noticed “a significant drop” in debit transactions from Wal-Mart.

Visa’s discovery of the policy prompted weeks of correspondence and negotiations between the two companies. Wal-Mart reportedly confirmed it had adopted a PIN-only policy, but denied it constituted a breach of the contract. The retailer “temporarily reconfigured” its terminals to allow for a signature option, but Visa says it found the process unacceptable. The companies ultimately failed to resolve the issue, leading to Wal-Mart filing its lawsuit May 10 in a Manhattan court.

Visa claims Wal-Mart signed the contract with the intent of pursuing a PIN-only policy no matter what the agreement said. “To induce Visa to execute the agreement, Walmart knowingly and falsely represented to Visa in…the agreement that Walmart would continue to allow cardholders the option of signature verification and that it would not require PIN,” the counterclaim says.

In a statement sent by email Thursday, Wal-Mart says “we filed our lawsuit against Visa to help better protect our customers. We have rightfully insisted on the use of PIN for debit card transactions in our stores while Visa has continued to demand the more fraud-prone signature verification, which is more profitable to them. PIN debit is the only truly secure form of cardholder verification in the marketplace today.”

Among other things, Visa is asking the court to dismiss Wal-Mart’s lawsuit and issue an injunction that would prevent the retailer from refusing to allow customers to use their Visa-branded debit cards without providing a PIN while the contract remains in effect.