Small Businesses Take on Visa, Mastercard & AmEx

SAN FRANCISCO (CN) - Merchants claim in a federal class action that credit card companies are using the installation of new chip readers on credit and debit cards to shift the liability of fraud from financial institutions to merchants.

The class action, filed on Tuesday in San Francisco Federal Court, was Courthouse News' top download on Wednesday and Thursday.

Plaintiffs B&R Supermarket, Milam's Market and Grove Liquors claim that most of the major financial institutions in the United States, Japan and China have conspired to put the burden of compensating consumers for credit card fraud onto merchants.

Some of the named defendants include Visa, Mastercard, Discover, American Express, Wells Fargo, Capital One, U.S. Bancorp, Barclays and more.

The case revolves around the introduction of the EMV chip, a square chip that functions as a microprocessor and has rapidly replaced the magnetic stripe as the means by which transactions occur, according to the complaint.

Because the EMV chip has a more dynamic capacity to register transactions, the chip is viewed by many to be a more secure means of rendering payment, thereby curtailing credit card fraud.

In Europe, the EMV chip is the preferred method for credit card transactions since the consumer is also required to enter a PIN number.

While the chip's introduction in the U.S. market has been slower to take hold, financial institutions have begun to ramp up implementation.

According to the plaintiffs, merchants have borne the brunt of not only the transition to the new system, by buying new chip readers for their stores, but they must also pass an arduous certification process before the financial institutions will agree to assume the burden for fraud, the complaint says.

In the past, when consumers report misuse of their credit or debit card, the financial institutions reimbursed the customer and bore the onus for recouping the funds from fraudsters.

But the merchants say banks are now forcing the financial liability on stores or requiring an extensive certification process the plaintiffs claim is actually impossible to achieve.

"In what defendants dubbed a 'liability shift' the issuing banks and the networks decreed that, as of Oct. 1, 2015, liability for billions of dollars of card-present chargebacks would shift from the issuing banks to the merchants, unless the merchants could satisfy certain conditions - conditions, it would turn out, which were impossible for the class members to meet," the merchants say in their 47-page complaint.

The merchants add that while large retail corporations had no problems obtaining certification by the deadline, their experience was different.

"The networks, the issuing banks and EMVCo knew from the outset - and the class members are now learning - that the 'certification' process would take years after the Oct. 1, 2015 liability shift was imposed," the complaint says.

Meanwhile, the merchants say they are incurring expenses related to fraud while awaiting word whether they had received the necessary certification, despite having purchased new machines and performed extensive training.

While Visa, Mastercard, American Express and the others operate separately, the plaintiffs claim the owners of EMVCo operate collectively and account for 100 percent of the general purpose card network services market in violation of antitrust laws.

The merchants say the defendants have a history of anticompetitive behavior, pointing to a 1998 case in which the U.S. Department of Justice sued Visa and Mastercard claiming the joint governance of the companies made it easier for them to form exclusionary rules that harmed consumer welfare.

The merchants are suing for violations of the Sherman Antitrust Act's prohibition on agreements to restrain trade and its California equivalent, and unjust enrichment. They seek treble damages.

The class is represented by Patrick Coughlin of Robbins Geller Rudman & Dowd in San Diego, who did not return a voicemail seeking comment by press time.

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