The Networks’ Signature Moment

Ever since Visa Inc. and MasterCard Inc. announced their plans five years ago to introduce EMV chip cards in the United States, controversy has dogged the U.S. market’s effort to wean itself off of the magnetic stripe. One of the biggest conflicts has to do with how EMV cardholders should authenticate themselves. Generally speaking, though I’m sure there are exceptions, most merchants prefer PIN authentication, while the networks and many of the bank issuers would like to steer cardholders to sign for their transactions.

While this argument has percolated for years, it has flared up in the months since October 2015, when the transition to EMV went into high gear with the networks’ liability shift. Recently, the matter generated two major lawsuits. Home Depot sued Visa and MasterCard last month, and in May Wal-Mart sued Visa.

The Home Depot suit is a federal case and alleges (among many other things) that both networks are trying to prevent the giant home-improvement retailer from accepting PINs on both EMV credit cards and EMV debit. The Wal-Mart case was filed in a New York State court, but alleges much the same thing with respect to EMV debit.

Now, there’s a lot of background matter here that we simply don’t have space to deal with, including controversies over the tardy common application identifier for EMV debit, the debit-routing requirements of the Durbin Amendment, and the historical situation in the U.S., where mag-stripe debit authentication was bifurcated years ago into PIN and signature. You can read up on all of this by searching on digitaltransactions.net.

Our concern here is with what lies at the bottom of the basic argument. On the face of it, the merchants have a pretty strong case. PINs are inarguably more secure than signatures, which are so easy to fake that most cashiers stopped comparing them decades ago. Wal-Mart, indeed, set up its EMV debit system so that only PINs would work.

Of course, there’s a deeper agenda here than just a concern for safer transactions. With debit, network interchange pricing has historically been lower for PIN transactions than for signature. So, for merchants, PINs mean cheaper transactions; conversely, banks earn less on PIN-based payments. Also, signatures send transactions through the Visa and MasterCard systems, while PINs open them up to other networks (for more on this, see senior editor Jim Daly’s story in this issue).

So what is the networks’ case? We’re not so sure, and that’s the point. To the press, Visa and MasterCard have been less than forthcoming on this matter. Until they explain themselves more clearly, the merchants’ suspicions bid fair to have the ring of truth.