February 24, 2011
With $21.5 billion in assets, enough to rank it the second-largest credit union in the country, Raleigh, N.C.-based State Employees Credit Union will sustain a substantial loss of debit card interchange income when the Durbin Amendment to the Dodd Frank Act takes effect this summer. But that isn’t stopping the institution from going ahead with plans to convert its entire 1-million-card debit portfolio to EMV chips.
SECU said last week it will start the conversion next month and complete it by year’s end. It thus becomes the second U.S. financial institution to convert a card portfolio to EMV, the international technical standard for chip-and-PIN cards, and the largest so far. The cards will also retain magnetic stripes. “This if the first kind of wholesale product strategy [for EMV],” notes Patricia Hewitt, director of the debit advisory service at Mercator Advisory Group Inc., Maynard, Mass. Last year, United Nations Federal Credit Union, an 88,000-member institution, announced it would convert its cards to EMV, a standard that has been adopted by most advanced economies outside the U.S., including Canada and Mexico.
The Durbin Amendment's interchange caps and other restrictions apply only to financial institutions with more than $10 billion in assets. But while the loss of debit income from Durbin may be giving some large-institution officials pause, SECU says its EMV plans were well under way before the amendment became law last summer. Indeed, the credit union’s rationale for EMV, says Leanne Phelps, senior vice president for card services, remains unaffected by Durbin. Instead, she says, SECU hopes to stay abreast of technology, and ahead of fraud trends, by adopting EMV across its entire debit portfolio. Chip-and-PIN technology combats counterfeit card fraud. “It is [an expensive decision],” she says. “But the rest of the world is going this way. We’re trying to position ourselves for the future.”
She adds that SECU is concerned about the potential for card fraud to migrate to the United States once Canada completes its EMV rollout, currently in progress. “What’s going to happen when Canada and Mexico go EMV-capable?” she asks.
The economics of chip-an-PIN may also be more favorable these days. EMV cards will cost about $2.35 apiece next year if they incorporate both contact and contactless capability, or about $2 apiece with only a contact function, according to forecasts by Mercator Advisory Group. That’s down from recent levels but still well above the approximate 50-cent cost of conventional mag-stripe cards. But Phelps says SECU’s cost will run only about 70 cents above what the institution pays for mag-stripe cards. “If [$2] is what you’ve been quoted, there’s plenty of negotiating room,” she says. “I hope we negotiated well.” SECU’s cards are being supplied by Oberthur Technologies Group, a French chip card maker.
Also, while SECU says there will be no fees associated with the new cards, Mercator’s Hewitt says the credit union ought to realize some reduction in fraud losses, as well, because of EMV. “There are some below-the-line savings,” she notes.
SECU is moving forward despite industry concerns not only about reduced interchange income but also about uncertainties over how issuers’ fraud-control costs will be allowed for by the Federal Reserve when it formulates its final pricing rules. The Fed, which the Durbin Amendment charged with implementing debit regulation, released a proposal in December that capped interchange at 12 cents, but remained silent on fraud costs. The amendment says such costs may be taken into consideration by the Fed under certain circumstances.
This uncertainly led Visa Inc. earlier this month to limit a new Payment Card Industry data-security standard (PCI) incentive to EMV markets outside the United States. The incentive allows merchants to avoid proving PCI compliance if they process at least 75% of their Visa transactions with EMV-capable terminals. Visa said it did not want to offer an incentive that would put pressure on U.S. issuers to invest in EMV at a time of uncertainty about Durbin’s fraud allowance.
Phelps says that even though SECU is going ahead with a full EMV conversion of its Visa debit portfolio, Visa was right not to offer the incentive in the United States. “Everybody’s cautious right now,” she says. “It would not have been appropriate for Visa to release that [incentive] in the United States.”
On the merchant side, at least, this may remain a moot point for some time, as few merchants have made any moves toward adopting EMV readers. But Phelps says SECU will be prepared if big-box retailers install the technology, as some of them have indicated they will. “Wal-Mart is the number-one merchant for our members,” she notes. “When Wal-Mart adopts EMV, we’ll be ready.”
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