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Get ready for the next billion-dollar fight in the credit card industry. Two small merchants in Florida say the industry’s shift to chip-enabled credit cards has caused them a tenfold increase in fraud losses — money that banks and payment networks have kept for themselves.

The merchants — a 4-store grocery chain and a liquor store — are now the lead plaintiffs in a potential class-action lawsuit that “certainly runs into the billions of dollars” filed this week in a California federal court.

According to the lawsuit, Milam’s Market and Grove Liquors faced 88 chargebacks for fraudulent transactions totaling $9,196.22 from MasterCard and Visa since the Oct. 1 liability shift, plus chargeback $5 fees for each item. During the same span last year, the firms faced only four chargebacks.

The penalties come because the stores aren’t yet accepting the new chip-enabled EMV credit cards. But in the lawsuit, the stores say they purchased the necessary EMV equipment long ago; they just can’t turn on the chip readers until their systems receive “certification,” a step which is “totally out of their control.”

The lawsuit contains an exhibit showing that the time frame certification for the equipment purchased by the grocery store is “n/a,” or unknown.

“Tellingly, nothing Milam’s Market could have done — short of making the business crippling decision to stop accepting Visa cards — could have prevented this outcome,” the lawsuit says. “Class members such as the plaintiffs here, could not timely comply with the standard, no matter what they did, because the Defendants refused to, or were unable to, ‘certify’ the new equipment by the deadline — or, indeed, the ‘certification’ process would take years after the … Liability Shift was imposed.”

The lawsuit (Image via Bob Sullivan).
The lawsuit (Image via Bob Sullivan).

The lawsuit goes on to allege that the credit card networks and other industry members knew the transition could not completed by the deadline, and conspired to simply hand the bill for fraud to merchants.

“What defendants knew, but Milam’s Market, Grove Liquors and the rest of the Class did not and could not know, was that purchasing new (point of sale) equipment and training their staff was not going to be enough,” the lawsuit says. Requiring working EMV hardware and software by the Oct. 1 deadline were conditions, it would turn out, which were impossible for the Class members to meet and which the Networks, the Issuing Banks and (industry) knew were impossible to meet.”

Merchants received no compensation for what was a one-sided change to the business relationship, the lawsuit suggests.

“Merchants were not consulted about the change, were not permitted to opt out, were not offered any reduction of the interchange fee, the merchant discount fee, the swipe fee — or any other cost of accepting defendants’ credit and charge cards,” it reads. “This is in contrast to the United Kingdom and Australian markets where merchants were given interchange concessions which helped share the costs of fraud and purchasing and deploying new hardware and software.”

The lawsuit suggests that the bottleneck in adoption is being caused by the software needed to run the EMV chip checkout process.

“Defendants … knew that even providing the software to support EMV cards was a challenge, according to Terry Crowley, CEO of TranSend, a company that manufactures the software to make merchants’ equipment work with EMV chip card,” it reads. “Crowley said that while software code for card-accepting devices was historically simple enough to be written on the back of a business card, ‘now with EMV, that same software wraps around the walls of a room three times…hundreds of thousands of lines of code.’ With the Liability Shift deadline having passed, Crowley says, suddenly there is a ‘fire drill’ to replace all of this simple software, compounded by the facts that the EMV code is hard to write, harder to certify and that few EMV software developers understand the U.S. market.”

In an email to me, MasterCard said it was aware of the lawsuit and is reviewing the claims.

“What I can say at this point is what we’ve said since introducing our roadmap in early 2012,” Seth Eisen, MasterCard spokesman, said. “There was never a requirement for any party — issuer or merchant — to move to EMV. Using insights from merchants, issuers and others, our roadmap and the related liability shift provided incentives to prompt for the most secure ways to pay. We have and continue to work with parties across the industry — merchants, issuers, processors, manufacturers – to assist in this migration.”

Visa did not immediately return a request for comment.

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