Getting From Here to EMV

Endpoint

EMV adoption is a costly and lengthy process for financial institutions, but it can be managed with a methodical plan and a transitional approach, says Jamie Topolski.

The migration to EMV in the U.S. has been hindered in no small part by the difficulty in identifying a compelling business case.

The U.S. payments market is in transition from magnetic-stripe card technology to chip-based cards using Europay-MasterCard-Visa (EMV) specifications, a move driven primarily by the need to improve security in the wake of large-scale data breaches and provide a better experience for cardholders who travel internationally.

While there is no direct mandate requiring EMV technology in the U.S., Visa Inc., MasterCard Inc., and other payment brands will shift liability for certain types of card fraud to parties that are not EMV-compliant by October 2015, creating a sense of urgency for the industry.

To move the market forward, debit networks are licensing chip-card technology offered by Visa and MasterCard. However, a significant amount of work remains to ensure that the U.S. has the infrastructure and processes in place to support EMV technology, particularly for debit transactions. Financial institutions in particular must act now to begin a practical, transitional approach to EMV migration, one that leverages the benefits of chip-based cards while controlling associated costs.

Gaining Traction

The U.S. is the last first-world country to migrate to EMV technology, which is widely used in most of the world, including Europe, Asia, Latin America, and Canada. Although chip-based cards offer several advantages, of the approximately 1 billion credit and debit cards in use in the U.S. today, just 20 million are chip-based cards, according to the Smart Card Alliance.

Cards with EMV technology provide better protection against card skimming, which illegally captures data stored on a card’s magnetic stripe to produce counterfeit cards or for other fraudulent purposes.

So why did chip-based cards previously receive a lukewarm reception in the U.S.? Despite security advantages, the migration to EMV technology in the U.S. was hindered in no small part by the difficulty in identifying a compelling business case.

The Pleasanton, Calif.-based payments-research firm Javelin Strategy & Research estimates that industry costs for terminal and card migration in the U.S. will be as high as $12 billion. For financial institutions, these expenses include costs related to card production, upgrades to point-of-sale and ATM hardware and software, changes in card-processing software, and EMV testing and certification.

Card issuers will also incur marketing expenses to educate consumers about EMV-enabled cards, including how they work and their benefits. While a traditional return on investment may be difficult to calculate and a resulting reduction in fraud hard to forecast, the industry is starting to view these expenses as a cost of doing business.

Another obstacle that slowed EMV adoption is market readiness. Issuing new chip-based cards is a lengthy and costly process, and individual card issuers must contract directly with Visa or MasterCard for custom certification and implementation processes. A scalable operational model remains a work in progress.

Evolutionary Approach

A successful EMV implementation plan outlines a transitional approach for the introduction of chip-based cards, consumer education, and migration of an existing card base to chip-based cards. Financial institutions should engage in discussions with all partners that affect their overall electronic funds transfer (EFT) programs, including card-manufacturer and personalization bureaus,  transaction processors, ATM vendors, and network providers.

They should take time to thoroughly understand each partner’s product road map and timeline, learn what investments will be necessary, and estimate costs. Knowing what to expect from every program partner is the first step in developing an effective EMV- migration plan.

Consumer education is essential to a successful migration, and should include marketing materials, Web-site content, and telephone scripts. Financial institutions must plan for new card issuance, card reissues, and card replacements in a manner that will minimize the overall investment of time and expenses. Issuers should consider first offering a compliant EMV credit card with basic features, and as consumer acceptance and demand increases, add enhancements to leverage EMV-technology capabilities to deliver greater value and improved service.

Taking an evolutionary approach to the migration to EMV-enabled cards enables financial institutions to transition the card portfolio over time as greater clarity emerges and consumer demand grows. To minimize card reissue costs, financial institutions may want to consider adjusting expiration dates on newly issued cards to coincide with the October 2015 liability shift, which may increase the likelihood that issuers can organically reissue chip-based cards to coincide with the published compliance dates.

To minimize costs and begin consumer education on a smaller scale, financial institutions may also consider issuing chip-based cards to a small, defined segment of their cardholder base, such as frequent international travelers or military personnel stationed abroad.

The equipment required to support EMV technology can also be upgraded using a phased approach. For instance, until financial institutions are ready to introduce chip-based cards, ATMs can be outfitted with an EMV reader without enabling transaction-processing capabilities.

Strategic Partnerships

Given the impending liability shift, the potential for fraud reduction, heightened consumer concerns about fraud, and the need to support card use internationally, it’s time for financial institutions to begin planning for the migration to EMV technology.

To best manage this complex, evolving landscape, financial institutions are increasingly turning to strategic partnerships to provide consultation and project management support to help create and execute an EMV-migration plan quickly, efficiently, and with as little friction as possible.

A practical, transitional approach to EMV migration enables financial institutions to leverage the benefits of chip-based cards while controlling the associated investment.

Jamie Topolski is director of alternative payment strategies, Output Solutions, at Fiserv Inc., Brookfield, Wis.