Why merchants insist card-not-present rates no longer apply

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With most of the major card brands deciding to no longer require signature authorization on card transactions, merchants want to see more network rules go the way of the dinosaur.

Standing out like a sore thumb is the card network practice of charging higher fees for card-not-present transactions, a practice that made a lot of sense in its early days when merchants might mail or phone in orders with payment information. Those transactions remain high-risk even today, but other situations categorized as card-not-present are far more secure.

Newer transaction types like e-commerce and mobile payments use tokenization, biometrics and other security layers, making them arguably more secure than someone presenting a plastic card in person.

Even if this were not the case, online merchants carry the liability for fraud.

"Mobile payments and other innovations have been assigned card-not-present rates with little or no thought or analysis of the unique characteristics of these transactions," said Mark Horwedel, CEO of the Merchant Advisory Group. "It's high time the networks removed the premium charged for transactions that occur on the internet or in other venues in which the merchant is taking most or all of the risk of fraud."

Stephanie Martz, senior vice president and general counsel of the National Retail Federation, says much of the problem lies in whether the networks would establish less expensive options for routing online and mobile payments.

"Until there are true routing options for online and mobile transactions, charging monopoly rates is going to continue to be a problem," Martz said.

Visa, the only one of the four major U.S. card brands to have not announced plans to drop the signature requirement, says it cannot address any potential rate or interchange adjustments or details. Mastercard did not respond to inquiries.

The complexity of the interchange tables in the U.S. has been at the core of many legal problems between card brands and merchants, but also has a role in how difficult it might be to determine exactly where the card networks could address overall changes. Rates differ by type of transaction, retail sector, risk levels and the amount of the transaction.

"There are definitely a lot of gray areas," said Brian Riley, director of card services for Mercator Advisory Group. "For example, Apple Pay transactions come across the network differently (as cardholder present) than your regular e-commerce transaction, but it's the question of whether the card is really present or if it is present within an operating system."

In some ways, that's what merchants are arguing — that today's technology provides many more ways to positively determine that persons initiating transactions online are actually who they say they are.

Still, a standardized approach to card-not-present transactions is unlikely, Riley said.

"It's not going to all be done in one way," he added. "You have market power players like Walmart and Jet, which add a whole different dimension, and you have many different mobile wallets, which operate under a whole other interchange table."

This landscape leaves the networks and industry stakeholders contemplating new options such as "customer present" for mobile wallets that render the plastic card obsolete.

This isn't just an option for new digital lines of business. Older industries such as airlines operate almost solely on card-not-present transactions for bookings and, as such, pay a premium to the card brands for that type of authorization and processing.

While the airlines should arguably have different fees because they are paid in advance, these companies have been operating too long on the dated perception of card-not-present transactions, which can carry as much as a 20% premium over card-present transactions, said Chris Priebe, finance director for treasury payments and risk at Southwest Airlines.

"Payment technology is much more efficient and secure now, but with the card-not-present rules, we still own the fraud if someone steals from us," Priebe said.

For every dollar of actual card fraud loss and loss prevention that Southwest is obligated to incur, Priebe estimates that Southwest pays an additional $10 to the card companies in the form of the card-not-present premium.

In another sector, that’s equivalent to paying 10 times your car insurance premiums, but still having to pay for all damages to your car. Merchants argue that no insurer could afford to price their product this way in a free market, nor should the card networks continue to price this way for card-not-present commerce.

That said, the advancement in e-commerce transactions allowed the airlines since the 1990s to ultimately lower costs as bookings moved online.

"You can't deny that without card-not-present, the airlines wouldn't have much online business, and lower online prices have made the customer much happier as well," Priebe added. "But the software and hardware advancements of the day had as much to do with our success in our dotcom channel as did the creation of card-not-present acceptance rules. Software and hardware costs have declined precipitously, whereas CNP network fees have done nothing but increase over the past 20 years."

Merchants will continue to press the card brands and payment providers on what they would consider a fair price for digital payments.

"Clearly, something has to happen," said Thad Peterson, senior analyst with Boston-based Aite Group. "We have transactions occurring now in the card-not-present space that are as, or more, secure than transactions happening in the physical world space."

A concept that has been brought up among payments professionals is "device present" rather than card present, Peterson said. "That would seem to be a logical approach in terms of migrating to something different," he added.

Regardless of how interchange rates evolve, everyone involved in payments is on the same page about making it easier for consumers to complete transactions online or at the point of sale.

"Everyone in the industry understands that friction is the enemy and anything to reduce it is a win," Peterson said. "To me, it's a consistent then to remove signatures and move to dual interface cards and other mobile initiatives."

That sort of development would lead to card-not-present transactions being far more secure and, thus, not in need of higher risk protection for issuers and the networks.

Horwedel and his MAG organization are a little more blunt about it.

"The networks have historically been reluctant to retire these relics of the past simply because they reward the issuers and penalize the merchants," Horwedel said. "Logic should prevail as with the retirement of the signature requirement."

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Payment cards Interchange fees Network rules Card fraud Fraud liability