Home improvement chain, The Home Depot Inc. (NYSE:HDC) filed a lawsuit in federal court this week accusing credit card issuers, MasterCard Incorporated (NYSE:MAC) and Visa Inc. (NYSE:VD) of restricting merchants from offering more secure transactions. According to Home Depot, these restrictions will result in higher transaction fees due to fraudulent charges.
Home Depot wants to be able to require the use of PIN, along with or instead of a signature because, as HD maintains, the PIN code is more secure. Banks say they don’t want to burden customers with using a PIN for transactions. Banks receive higher fees for signature-based credit-card transactions than they do for ones based on PINs.
Industry Analyst Weighs In
Matt Schulz, senior industry analyst at CreditCards.com told Woo Trader, "I'm not surprised to see these types of lawsuits. Merchants are incredibly frustrated because they're spending a ton of money and still not getting the safest, best solution."
Schulz added, "The truth is that chip and signature is a half-step, security-wise. It's less secure than chip and PIN simply because it's a whole lot easier to fake someone's signature than it is to know their PIN."
PIN Used Worldwide
The case for use of a PIN along with the chip – with or without a signature – is bolstered by the fact that merchants around the world, where chip cards have been in use for years, typically require a PIN.
This reality has been experienced by Americans traveling abroad only to discover their non-chip and PIN credit cards are not accepted in Europe and elsewhere.
Home Depot Not Alone
Wal-Mart Stores Inc. (NYSE:WMTB), in May sued Visa saying the company’s policy requiring merchants to allow customers to use their signature instead of a PIN leads to fraud and higher costs for Wal-Mart.
In addition, as noted above, signature transactions are routed over Visa’s debit network and result in higher fees levied against Wal-Mart – even when fraud is not committed. In the lawsuit, Wal-Mart argued that 91% of fraudulent purchases are done with signatures.
More companies are expected to follow suit along with Home Depot and Wal-Mart in the future.
Winning Bets On Chip And Pin
Meanwhile, as the court battles rage on, several stocks have been mentioned as potential chip and pin winners – primarily due to their position in the chip card industry.
Chipmaker NXP Semiconductors (NASDAQ:NXPIC) manufactures credit card chips. specialized chips for credit cards. According to analyst Vijay Rakesh, “With around 80% share of contact-less EMV cards worldwide, NXP should be a beneficiary of a potential 2014-15 EMV wave in the U.S.”
NXP this week said it would sell its standard products division to a Chinese private-equity consortium, a move that could reduce debt and raise the company’s credit ratings.
Although NXPI makes the chips, VeriFone Systems Inc. (:PAYN/A) creates point-of-sale payment devices and markets security and encryption software. The company works with 70% of the top 1,000 retailers in America and 83% of the top 200.
Some analysts believe VeriFone looks undervalued under $20, making it a bargain – assuming most of the concerns including execution in emerging markets are addressed.
Finally, PayPal Holdings Inc. (NASDAQ:PYPLC) just might be positioning itself to be the small business card reader dejour. The reader plus app has long been used to accept a wide range of payments and last month PayPal said a revamped version would work with chip and PIN cards.
Analysts covering PayPal believe the stock will reach $44.06 within 52 weeks.