Federal Reserve Says Visa Violates Law By Steering Debit Card Transactions To Its Own Network

The National Retail Federation recently called on Visa to stop using new EMV technology to steer debit card transactions to its own processing network, a practice the Federal Reserve says violates merchants’ legal right to competition over who will process the transactions.

“We write on behalf of millions of American merchants and our customers who have been enormously impacted by both the undermining of competition and the confusing transition to EMV chip card acceptance,” NRF and seven other retail groups said in a letter to Visa CEO Charles W. Scharf. “We write seeking information on the immediate steps that Visa will take in response to a declaration from the Federal Reserve Board of Governors that the technical specifications and rules provided to merchants as part of the EMV migration violate federal law.”

“Visa charges more and offers less security while the competition charges less and does a better job of keeping consumers’ debit cards safe,” NRF Senior Vice President and General Counsel Mallory Duncan said. “We think retailers should be allowed to choose the processor who provides the best value and offers their customers the best protection, and so did Congress when it passed the law giving retailers that right. We want Visa to obey the law.”

On many credit/debit card readers installed since the card industry began implementing new Europay MasterCard Visa chip card technology last year, debit card users are presented with a screen that asks them to choose between “Visa Debit” and “U.S. Debit.” For those who choose Visa Debit, the transaction is routed over an expensive network owned by Visa and the consumer is usually required to use an easily forged signature to approve the transaction. When U.S. Debit is chosen, the transaction goes over the retailer’s choice from about a dozen competing networks that charge merchants less but provide more protection by allowing the use of a secret, secure Personal Identification Number, or PIN. Other alternatives offered by Visa can lead to the same results even without the screen.

NRF contends that the practice steers transactions toward the Visa network, and that the higher fees charged by Visa must be built into the cost of merchandise, ultimately contributing to higher prices paid by consumers.

The Federal Reserve ruled earlier this month that the practice violates a 2010 debit card reform law that says retailers must be allowed to choose between at least two unaffiliated networks to process debit transactions.

“Such a requirement is not compliant with (the law) because it prevents the merchant from directing the routing of electronic debit transactions,” the Fed said. The Fed confirmed that the choice of networks is up to retailers and said any action that “inhibits” that choice violates the law.

NRF said retailers have been pressured to accept the Visa Debit/U.S. Debit screen because Visa has instructed companies that certify the installation of EMV terminals that the screen must be shown to be displayable before the terminals can be certified. Under rules unilaterally imposed by the card industry last year, retailers who do not have certified chip card readers are subject to increased liability for fraud if a chip card turns out to be counterfeit, exposing merchants to huge losses.

NRF is the world’s largest retail trade association, representing discount and department stores, home goods and specialty stores, Main Street merchants, grocers, wholesalers, chain restaurants and Internet retailers from the United States and more than 45 countries. Retail is the nation’s largest private sector employer, supporting one in four U.S. jobs – 42 million working Americans. Contributing $2.6 trillion to annual GDP, retail is a daily barometer for the nation’s economy. NRF.com