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.

Such an expense can significantly impact small businesses who can't afford to absorb such losses. Not only are small businesses impacted, but so are large retailers such as Wal-Mart (WMT), who is actually suing Visa for allowing customers to verify chip-enabled debit card transactions with a signature instead of a PIN, thus making the transaction fees much larger.

The extra fees will add up to as much as $7,000 a year, Fillers said, a significant loss for a small business like his. More than 1 million retail locations in the U.S. can take chip cards, and more than two-thirds are small to midsize businesses, according to Visa.

Even the world's biggest retailer is affected by migration to chip cards. Wal-Mart filed a heavily redacted complaint in New York state court on Tuesday claiming that Visa USA wants it to verify transactions made via certain debit cards with signatures rather than the chip-and-PIN protocol, which is more secure and has lower interchange fees.

"Visa nevertheless has demanded that we allow fraud-prone signature verification for debit transactions in our U.S. stores because Visa stands to make more money processing those transactions," Wal-Mart spokesman Randy Hargrove said in an e-mail.

The reason this is occuring is mainly because many processing companies and vendors haven't upgraded client terminals, and in many cases the choice of network is preset. Merchants can have the terminals re-certified, but that would be yet another expense that would need to be incurred.

"Many of the systems were set up to the most expensive form of routing the transaction, which is typically a Visa," said Mallory Duncan, an NRF senior vice president.

While the terminals' software can be updated to promote lower-cost debit networks, that may require the readers to be recertified, a long and costly process, Duncan said.

All of this chaos stems from the shift to what is supposed to be a more secure way of processing transactions using a technology called EMV, which stands for Europay, MasterCard, and Visa, the backers of the technology. Of course Visa and MasterCard say the network routing issue is not done on purpose, and sometimes if it is not a settings issue, it must be the customers fault for selecting the wrong network.

Visa says it doesn't mandate any particular approach with merchant terminals.

"It's important to remember that the debit environment is very competitive, and Visa actively competes for transactions," the company said in a statement. "If we are not competitive, we will not win business."

MasterCard said its and Visa's networks are often chosen simply because they are the most well-known.

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Yes, that must be it. The customer is just stupid and selects the brand name that's on his/her card. There are certainly no other conclusions to be drawn about the mixup...

A technology gets implemented that was designed and backed by transaction processing companies, which forced merchant terminals to get updated and often preset with the more expensive network. Actually, one alternative conclusion could be that the confusion was absolutely intended by the Visa and MasterCard's of the world as a way to generate more revenue while having plausible deniability.