Why is Wal-Mart suing Visa?

Wal-Mart is taking Visa to task over chip-and-PIN cards, which are in still in the midst of widespread adoption in the United States. 

Wal-Mart is taking Visa to task over credit card transactions, showing that when it comes to updating the way we pay, the United States still has a ways to go.

On Tuesday, the world's largest retailer filed a suit against the credit card company, requesting that shoppers be allowed to verify their purchases using a personal identification number (PIN) when they check out with a chip-enabled card. According to Wal-Mart, Visa prohibits the use of a PIN. Cardholders verify their purchases using signature, a method Wal-Mart says is less secure. 

Wal-Mart and Visa have gone head-to-head over payments in the past. In 2014, Wal-Mart sued Visa for $5 billion, alleging that Visa was charging payment-processing fees that were too high. In Tuesday’s complaint, Wal-Mart said that using the chip-and-PIN method would not only be more secure than payments made using a signature, it would also allow the retailer to use less expensive networks for routing payments.

The dustup comes in the midst of the transition to chip-based cards in the United States, which began last year. 

According to the Federal Reserve, the US was the last developed country to rely on cards with a magnetic strip, even though research shows chip-and-pin cards are safer to use than those with a magnetic strip. That’s because cardholder data on cards with magnetic strips can be read, or “skimmed,” by hackers using a card-reading device. Chip cards are safer because new codes are introduced in each transaction, making it difficult for hackers to copy and reuse them.

Chip-and-PIN cards have been the norm in Europe for a long time; they have been widespread in the United Kingdom since 2006.  In 2015 alone, the UK processed more than 1 billion payments from chip-and-pin cards. But the US has been slower to adopt this payment method. Chip-and-PIN cards were first introduced to the US in October 2010, issued under the United Nations Federal Credit Union and targeting elite cardholders.The Smart Card Alliance, a payments industry group, estimated that less than 2 percent of cards had chip technology in 2014. 

The US transition came in the wake of a string of retail data breaches in late 2014, including hackers stealing millions of shoppers' data from Target's credit card servers during that year's holiday shopping season. Such fraud has declined significantly in other countries where the adoption of chip-and-pin cards is more established. In the UK, overall credit card fraud declined by 47 percent after chip cards were introduced, after a peak in 2008. In France, credit card fraud in retail transactions has declined by over 50 percent since 2004.

In 2015, the US payments industry issued an Oct. 1 deadline for adopting new technology standards, shifting the liability for fraud from banks to merchants . The deadline required retailers to install new chip card-friendly terminals and credit card issuers to issue new cards featuring chips.

Still, the transition has been slow going due to scale: There are over 10 million credit card terminals and 1.2 billion cards in the United States. In the lead-up to the deadline, many analysts worried that shoppers would grow frustrated about the extra wait time associated with inserting a chip card in a terminal and waiting for the card to be read, compared with the magnetic swipe process. 

"PIN and chip is going to be confusing. Adoption is going to be painful in the U.S. because people are so used to magnetic stripe,"  Bob Graham, senior vice president of banking and financial service at Virtusa, a global IT services company, told ComputerWorld last June.

For merchants, it’s an expensive change to make. New payment terminals cost between $200 and $1,000 to upgrade or install. WalMart upgraded its systems late last year.