Kroger Accuses Visa Of Using Threats To Force Supermarkets To Accept Less Secure Debit Cards

Image courtesy of Steve Swain

Another week, another large retailer accusing Visa of forcing stores to accept debit cards in a way that it is not as secure as it could be — and which will cost the retailer more money to process.

This time, it’s supermarket biggie Kroger, which filed a lawsuit [PDF] against Visa in a federal court in Ohio this week, alleging that the payment card network threatened Kroger with the potential loss of billions of dollars in sales in order to force the food retailer into accepting new chip-enabled debit cards without requiring PINs.

The new cards are colloquially dubbed “chip-and-PIN” cards. The chip part refers to the embedded microchip that makes it significantly more difficult to create fake cards and makes any data stolen from a payment terminal useless to the thief.

The PIN part, referring to the option to verify via PIN that the card-holder is indeed the account-holder, is the controversial part here. A number of retailers contend that this added layer of security further cuts down on in-store fraud and the use of stolen cards. PIN-verification networks are also often much less expensive to use than verifying a debit account through Visa.

According to the complaint, Kroger installed 54,000 new card readers in its 3,200 U.S. stores. The devices allowed Kroger to route debit card transactions over third-party PIN networks, which it claims resulted in more secure and more affordable transactions.

The retailer says that Visa approved these particular terminals, but decided after they were in place and activated that they didn’t comply with Visa’s rules, which — per Kroger’s version of the story — Visa explained took precedent over federal law intended to prevent monopolistic pricing on debit card transactions.

Rather than use PINs to verify cards, Visa would have accounts authenticated via its own application identifier (AID). The card network demanded that Kroger update its payment terminal software so that Visa debit customers would be asked to choose between “Visa Debit” and a generic “US Debit” — “as if cardholders would even understand what this means,” notes Kroger in a footnote.

This potentially confusing decision, which Kroger says it can’t even currently present to customers with its software, takes any choice away from the retailer. If the customer choose “Visa’s AID,” then the store has no option but to route that payment through Visa’s verification network.

When Kroger failed to re-format its payment terminals to comply, Visa began fining the supermarket chain. Thus far, Visa has invoiced Kroger for $7 million, of which the retailer has already paid $3.1 million.

Kroger claims that Visa has subsequently threatened not only to raise its rates for processing debit card transactions, but that it could cut off all Visa cards from being used at Kroger, a move that would result in near certain death for the chain.

Last year, Kroger customers made around $29 billion in Visa debit card transactions. Removing the Visa option would effectively cut out all customers who don’t have a card from a competing network and possibly drive away shoppers who only want to use their Visa.

“Even for a company of Kroger’s scale, Visa’s fines, its threats to continue fining Kroger, and its threats to cut off Kroger’s ability to accept Visa debit cards were significant to Kroger,” reads the complaint, “and Visa knew this.”

Kroger says it eventually relented, but that Visa subsequently decided that the only way for the retailer to avoid further fines and the possible loss of billions in Visa transactions was for Kroger to cease using all third-party verification networks. Last week, Kroger agreed to that condition but did so “under duress.”

The supermarket chain is asking the court to declare that Visa is violating federal law and guidelines put out by the Federal Reserve Board by blocking Kroger’s efforts to use the PIN requirement. Similarly, Kroger wants the court to clear up whether Visa can force retailers to reconfigure payment terminals to put the choice of payment network in the hands of the customers.

“We believe requiring a PIN for debit card transactions creates an added layer of security for our customers,” explains Kroger’s executive Vice President and CIO Chris Hjelm in a statement. “Banks know that PIN transactions are more secure, which is why they require a PIN for ATM transactions… We also believe that retailers should have a choice of where to route debit card transactions. The competition that comes with routing choice is healthy and will save our customers money. We believe that what Kroger is doing is right and allowable under federal law.”

The Kroger lawsuit comes on the heels of a similar complaint filed earlier this month by Home Depot, which alleged that Visa and MasterCard colluded to compel retailers to accept debit transactions without PINs.

In May, Walmart was the first to sue, claiming — like Kroger — that Visa was compelling the nation’s largest retailer to process debit transactions over the Visa network.

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