Are Chip Readers A ‘Clever’ Way For Visa And MasterCard To Increase Revenue?

Ever since merchants changed out payment terminals last October in order to comply with new rules and accept chip cards, merchants are seeing expenses relating to debit transaction fees increasing, in some cases as much as 20%. The reason stems from transaction terminals being set up to steer transactions in such a way that will generate the most revenue for the data processing company.

As the Chicago Tribune explains

In the past year, many merchants changed their payment terminals so consumers could use the newfangled cards. The problem is that about two-thirds of the new readers at smaller retailers aren’t set up right, according to Richard Crone, chief executive officer of the consulting firm. Their software tends to favor debit-payment networks from Visa (V) and MasterCard Inc. (MA) over other systems, which can be cheaper for merchants on certain transactions, he said.

For example, when customers insert a chip-based debit card into a new terminal, they may be offered only Visa’s network as the choice. Or they may see two options: “Visa debit” or “U.S. debit.” Since most consumers don’t know what “U.S. debit” is — it’s actually is a link to smaller networks like NYCE — they usually pick Visa.

Instead of being prompted to enter their PINs, shoppers are asked for a signature, and the merchant is charged from 1 percent to 2 percent per transaction when a card is issued by a smaller bank. About a third of all debit cards come from financial institutions with less than $10 billion in assets, whose fees aren’t capped under an amendment to the U.S. Dodd-Frank Act.

By contrast, most PIN-based debit-card transactions, such as those over the NYCE network, have average fees of about 25 cents — and slightly more for cards issued by smaller banks. Visa and MasterCard have PIN-based debit networks too, but many of the new terminals are set up to favor their more expensive signature systems.