The days of the magnetic-striped credit card are winding down as the U.S. slowly adopts chip cards. But the transition has been far from smooth, and the road to EMV utopia likely will remain bumpy.
Two years ago, Visa set multiyear deadlines for retailers and the companies that set up their card processing terminals to transition to an EMV system from mag-stripe card systems. MasterCard, American Express and Discover soon followed with their own, similar timelines.
The reason for the conversion from mag-stripe credit cards is simple: better security against counterfeit cards. A microchip is embedded in these cards and encrypts transaction and card data uniquely each time the card is used. It’s harder to capture useable data to clone cards. EMV — an acronym for the developers of the technology standard, Europay, MasterCard and Visa — is widely used in Europe, Asia and Canada and is fast becoming the standard elsewhere.
“When you talk about this transition, it’s one that will be years. It’s not a quick switch,” says Michael Misasi, a senior analyst at Mercator Advisory Group. “We still have a long way to go before consumers will face a new checkout experience.”
Where are we now?
Many major card issuers have rolled out chip cards to replace mag-stripe cards, but have mostly made the switch on cards geared toward globetrotters and business travelers. Consumers would be hard-pressed to find a U.S. retailer that takes these chip cards, yet. But that doesn’t mean there isn’t work being done to bring an EMV checkout terminal near you. In April, a huge milestone was met: More than 90 percent of companies that provide card processing services to retailers are now able to process chip cards, says Randy Vanderhoof, executive director of the Smart Card Alliance.
This summer, another challenge emerged. Just as the card industry figured out a way to process EMV debit cards to comply with provisions set up by the Durbin Amendment, a district court judge struck down a portion of the amendment that limited the fees retailers pay for each debit card transaction, also known as swipe fees.
This could affect the EMV rollout if changes to debit card routing are implemented along with new caps on swipe fees. It remains to be seen, says Vanderhoof. This is one reason retailers haven’t switched over their mag-stripe terminals to take EMV, which in and of itself is a costly change.
“Merchants have been delaying upgrades for EMV. They only want to make the changes one time,” Vanderhoof says. “And since there is uncertainty regarding debit cards, they’ve been holding off on making those changes.”
One retailer on the forefront of the EMV transformation is the world’s largest: Wal-Mart. The discount superstore is ready to make the switch from mag-stripe cards once it becomes clear that EMV has taken hold on U.S. soil, says Vanderhoof.
The retailer has had experience with the transition before, most recently in Canada, which started its EMV transformation in 2008. There are benefits to being an early adopter of EMV terminals, mostly that it encourages fraudsters to target more vulnerable, non-EMV retailers, said Owen Gingras, director of operations and technology for Wal-Mart Canada, at the April 2013 Card Forum & Expo in Boca Raton, Fla.
“If you’re one of the last ones, then you’ll get more than your fair share of fraud,” he said at the conference.
That information could be a good heads-up for American consumers as the shift occurs. It may be prudent to avoid retailers that don’t offer the security of EMV transactions because criminals may take advantage of their less secure card processing systems.
“In Canada, consumers would say to merchants who didn’t take chip cards, ‘Don’t you care about my security?'” Tracey Black, president of GFH Group, a Canadian payments consulting group, said at the same conference.
In a follow-up interview, she says, “Fraud is very fluid and it migrates quickly between and within countries.”
As it becomes harder in the U.S. to clone cards, fraudsters will likely focus on online sales, where the actual card is not needed to complete a transaction, says Misasi.
For example, France saw a dramatic increase in card-not-present fraud after its EMV implementation. Online card-not-present fraud almost quadrupled from 2007 to 2011, according to stats from the country’s Observatory for Payment Cards Security. But fraud involving the physical presence of the card, such as in-store transactions or ATM withdrawals, fell until 2010 and made a small increase in 2011.
“This is not a criticism of EMV,” says Misasi, “but outside the scope of what EMV was designed to protect against.”
More inconvenience, at first
It’s not only a fraud shift that will accompany the EMV conversion in the U.S. There will probably be a lot of confusion, too. Black says, at first, there will be a “chicken and egg” dilemma between retailers and card issuers. Who moves first?
“Issuers don’t want to issue cards until there is a critical mass of terminals where EMV cards can be used,” she says. “(But) merchants don’t want to deploy terminals until a substantial percentage of EMV cards have been issued.”
Many issuers started rolling out EMV chip cards for their business and travel cards last year and Vanderhoof expects that to gather more momentum into 2014. On the other end, retailers will have to get on board by 2015, at the latest, or take on the fraud liability as laid out by Visa, MasterCard, American Express and Discover.
At that point, a massive campaign will be needed to educate consumers on how to use their new cards, while retailers teach their employees how to run the transactions at checkout counters.
“EMV is a substantial undertaking,” says Black. “There will almost certainly be glitches.”