We all know VISA, MasterCard, American Express, and Discover collectively dominate the payments landscape. Individually, however, there are a number of important points of differentiation between them. From acceptance disparities to differences in customer service perception, these differences can tell you a lot about the institutions in question and their relative prospects for the future.
Card network liability policies are particularly revealing in light of widespread consumer concerns over fraud in the contemporary plastic-heavy payments landscape, which is increasingly reliant on electronic records and Web-based account management.With that in mind, it's fair to wonder: Which card network best protects consumers from fraudulent losses?
Fraud Liability Landscape
The short answer is it's a tie between Discover and American Express. All four companies guarantee their customers $0 liability for unauthorized credit card and signature debit card transactions, according to a recent Card Hub study, but Discover and Amex take things a step further. Both include ATM transactions under the umbrella of zero liability, and Discover also extends its policy to debit card transactions "verified" by PIN (Amex doesn't offer debit cards with PINs).
MasterCard does not supplement the protections afforded consumers by federal law for either PIN debit transactions or transactions made at the money machine. VISA will cover the former, but only for transactions that it processes. There's no way for consumers to determine how a given transaction will be processed, so that distinction doesn't do much but create confusion.
There is, of course, more to the story. Amex and Discover control a relatively tiny portion of the debit card and ATM markets, so while their policies are more consumer-friendly, they also come into play less often. It's therefore in any consumer's best interest to consider fraud liability safeguards on a case-by-case, payment-vehicle-specific basis.
Implications for Investors
It's unlikely that consumer perception will fully take into account the caveats that exist in the hierarchy of card network policies. Over time, market-share considerations will fall by the wayside and the message will inevitably get whittled down to the simple idea that Discover and American Express won't hold you liable for any unauthorized transactions, while VISA and MasterCard might.
American Express and Discover already have a leg up in terms of customer service, and their superior fraud liability safeguards will only serve to widen the gap. That's especially important when you consider 21% of consumers choose their bank based on customer service, according to a study from the consulting firm AlixPartners. Trustworthiness and the perception of effective management also happen to be the two biggest differentiators between financial institutions in the minds of consumers, according to First Data research. It's only natural for one to assume that a financial institution that can afford to eat all fraud losses in the name of customer service is managed better than one that can't.
The fraud landscape's nuances are also important in light of what they mean for merchants. Consumers will inevitably gravitate more and more to credit cards because of their superior fraud protections, and that will simply further reduce whatever short-term benefits interchange fee regulations have provided to date. In other words, merchants will still face high costs and will continue to pass them off to consumers in the form of higher prices.
Implications for Consumers
Ultimately, we're all consumers. Therefore it's important that you understand fraud isn't as big of an issue as you might have originally thought. Not only do statistics show that a mere fraction of one percent of all transactions are impacted by fraud, but a combination of network policy and federal law further reduces the odds that you'll ever incur personal losses.
That doesn't mean you shouldn't take reasonable measures to protect your finances. You should certainly try to use a credit card as much as possible so as to garner blanket liability coverage regardless of the network. It's also important that you review your account transactions as well as your credit reports in order to notice any suspicious charges as soon as possible. There's simply no need to live in fear, though.
Odysseas Papadimitriou, a former Capital One senior director, is the CEO of teh credit card comparison website Card Hub.