Chip and Pin: Not a Simple Quick Fix

In her article, 'Debit or Credit' Becomes A Point-of-Fail, Kelly Jackson Higgins discusses how recent data breaches have spurred retailers, lawmakers and the banking industry to seriously rethink security options for card payment systems. She includes the following third-party observation:

"Banks have gone out of their way to make us [consumers] feel comfortable. They're just charging the retailers for this, but it's going to hurt the retail industry," says Avivah Litan, distinguished analyst with Gartner. "Maybe banks will now move on chip and PIN" sooner, she says.

While it is true that retailers pay a disproportionate share of fraud costs and the reality of recent data breaches will goad banks and retailers both to make changes, we must be sure that they are the right kind of changes. The move to a computerized chip embedded in the card is not the complete solution to fraud in the United States.

First, merely adopting the chip cards without the requirement of PIN numbers, as the credit card companies had proposed, is a half-measure that will not make customer data and card transactions wholly secure. Yes, the chip is extremely difficult to counterfeit but without the second layer of cardholder authentication offered by the PIN, it does not solve for lost or stolen card fraud or Internet fraud.

Secondly, it’s important to note that the standard called EMV that the major card brands, Visa and MasterCard, are pushing for is actually their proprietary technology and opens the door for them to extend their already-powerful duopoly. Merchants are concerned that adopting EMV will allow the credit card companies to maintain their dominance in this technological arena and as a result prevent a competitive market from forming, perhaps one that moves beyond cards to customers using their mobile devices to make purchases.

No good can come from this kind of non-competitive market. We’ve seen proof of that with the credit-card companies’ exorbitant swipe fees. If the duopoly of MasterCard and Visa stymie competition in technology, too, in the long run it only ends up hurting both consumers and merchants.

Swipe Fees Drastically Slashing Supermarkets’ Thin Profits

Not many of us realize that when we quickly grab a $3 carton of milk from the neighborhood grocery store and pay with a debit card, the swipe fee that the store operator must pay the bank to process the transaction can be higher than the fee the store pays on $200 worth of groceries.

How can this be? Because the Federal Reserve is allowing banks to charge the maximum for a debit card transaction -- 22 cents -- under the Durbin Amendment, which reduced debit card fees from 42 cents a transaction.  The Durbin Amendment did not intend for banks to be able to charge 22 cents for a carton of milk or a cup of coffee, but that is the way the Fed is implementing the law.  A group of merchants have sued the Fed to make changes.

“These transaction costs have been eating into profit at an increasing rate,” says Bill Bishop, chairman of Willard Bishop, a consulting firm based in Barrington, Ill. “Retailers have been focused on trying to reduce them.”

Read more from Richard Turcsik, editor of Grocery Headquarters Magazine, here.