by: Jack Milford Ford, Attorney At Law – JMFord Law Offices
In the recent blog, Shooting Fish in a Barrel, the author asked, “So, amidst what looks like widespread carnage [EMV liability shift charge backs], how can U.S. IADs make hay post ATM liability shift?” The author was referring to the fast approaching October 2017 ATM EMV Liability Shift by those Networks, following Shazam’s and Master Card’s EMV liability shift which occurred in October 2016. Based on a variety of sources, the author states there will be approximately 200,000 merchant owned ATMs not EMV compliant by October 2017 for whatever reason those merchants have chosen not to do an EMV upgrade.
Over the past two years, I have publicly reviewed the financial risks associated with the EMV liability shift for IADs/ISOs, and in particular, the status of their current ATM processing contracts with merchants, and whether their contract terms mitigate or exacerbate their liability with regard to EMV charge backs. So, I am not going to address that again here. But I do want to address an inadvertent comment in the author’s blog. I have no qualms with the author’s three prong answer to his question above…Prioritize Size, Develop Strategy, and Keep Your Ear to the Ground. However, I am sure the author did not mean to use the word “poaching” in the Prioritize Size paragraph or to imply such activity be a part of one’s strategy. Poaching has had very negative conations and serious legal repercussions/consequences in the ATM industry going all the way back to 1998 when I first became involved in the industry. Over the years, poaching merchant accounts has resulted in a myriad of lawsuits being filed by IADs/ISOs against a competitor IAD/ISO/IA for tortiously interfering with a contractual relationship of the wronged IAD/ISO. For purposes of example, if Smith IAD solicits a merchant to terminate (breach) its current, in-force ATM processing contract with Doe IAD in order to sign a contract with Smith, regardless of reason (better payment plan, upgraded EMV compliant ATM, new ATM, etc.), and not due to a breach by Doe, Smith runs the liability risk of being sued by Doe for ‘stealing’ Doe’s merchant customer, as well as Doe suing the merchant for breach of contract. Such litigation leaves a bad taste in every body’s mouth and gives the industry a black eye!
And, the potential liability for a tortious interference with a contractual relationship claim, as well as the amount of the tort claim by Doe against Smith WILL probably increase if Smith flips a Doe merchant who has not upgraded its ATM to be EMV compliant. Why? Because, if the subject non-compliant ATM merchant account has been hit with EMV liability shift fraud prior to being poached, Doe, the IAD of record at the time the fraud took place, will be assessed with the chargeback by Doe’s sponsoring bank/processor, even though the merchant owns the ATM. Doe has contractually agreed to indemnify and hold harmless the bank/processor. So, Doe is going to be understandably upset that Doe is (i) saddled with the merchant’s chargeback, (ii) the merchant left by breaching its contract with Doe, AND (iii) went with Smith, supposedly with a new compliant EMV ATM. I am sure you can see why Doe will be furious and more than likely take legal action to recover losses and damages against Smith and/or the merchant.
So, I concur with the author’s three prong strategy. Just make sure you do not poach and when you “Keep Your Ear to the Ground”:
- Know the terms of a merchant’s current ATM processing contract
- Understand EMV chargebacks are not grounds for a merchant to terminate its current ATM processing contract
- If a merchant’s non-EMV compliant ATM incurred fraud & chargebacks assessed, chargebacks will be leveled against the then current IAD…the merchant ultimately is responsible for those chargebacks, but how does the then current IAD go about collecting those chargebacks from the merchant…be careful not to put yourself in the middle of a dispute between the then current IAD & the merchant
- Upgrade your ATM processing contracts to address EMV liability shift charge backs before signing any new merchant account:
- Almost all variations of processing agreements have typical boiler plate language that the merchant shall comply with Network Rules, federal and state laws and regulations
- Many IADs believe these agreement terms protects them…the merchant will be in breach of their applicable processing agreement if fraud occurs due to the ATM being non-EMV compliant, thus not incompliance with Network Rules & believe the merchant will then be liable for any chargeback and not the IAD. THEY DO NOT
- Upgrading to be EMV compliant, is not a requirement of federal law, state law, nor Network(s) Rules within the US. Networks, unilaterally, took the position in the US that as of certain dates, if an ATM operator did not choose to have its ATM(s) become EMV compliant, then under certain circumstances, the ATM operator would be liable for certain fraudulent transactions processed through the ATM operator’s non-EMV compliant terminal
- In other words, ATM operators have a CHOICE to upgrade or not, as the Networks have not mandated ATM operators do so
- To incentivize ATM operators to upgrade, the Networks said there would be consequences if an ATM operator did not choose to upgrade when certain fraudulent transactions were processed through their non-EMV compliant terminal re charge backs
- Unfortunately, being liable & being hit with the chargeback are not one & the same thing…as stated above, the applicable IAD’s account with the sponsoring bank/processor is the account that will be hit with the charge back regardless of the various merchant ATM fees that have been & will be deposited into the IAD’s account
In conclusion, with respect to the author’s call for “…preparation and planning….”, I would be judicious and prudent in what ‘shots’ you take to mitigate risks of potential litigation.