As U.S. Gears up for Chip Cards, a Big-Box Merchant Group Points to Key PIN Issue

Among card networks, payment processors, point-of-sale terminal manufacturers, and even issuers, the coming of EMV chip card payments to the U.S. has an aura of inevitability on par with Mitt Romney securing the Republican presidential nomination. But just don’t tell that to one critically important sector in electronic payments: merchants.

“I’m not sure that the market is ready,” Mark Horwedel, chief executive of the Merchant Advisory Group, an association of mostly big-box retailers concerned with payments issues, said Wednesday at the Electronic Transactions Association’s annual meeting in Las Vegas. “There is considerable disagreement between financial institutions and the merchants about how this device rolls out to market.”

Merchants ultimately will bear the cost of new point-of-sale hardware, software, and changes in their payment-processing operations to accept chip cards built to the so-called Europay-MasterCard-Visa specification as replacements for magnetic-stripe cards. EMV cards now dominate every corner of the industrialized world except the U.S. At the ETA conference, Horwedel was a member of a panel whose mission, according to its title, was to assess whether EMV is “finally, actually, really here” in the U.S. now that Visa Inc., MasterCard Inc., and Discover Financial Services have launched programs meant to encourage domestic EMV payments.

Another panelist, Greg Boardman, senior vice president of product and development at Atlanta-based POS terminal maker Ingenico North America, a unit of France’s Ingenico S.A., said Ingenico’s devices are now enabled for EMV as well as near-field communication (NFC) technology for mobile payments. “As a manufacturer, we’re not even considering the world without EMV and that certainly applies to the U.S.,” Boardman said, later adding, “We’re building everything around an EMV core.”

Bill Weingart, chief product officer of Cincinnati-based merchant acquirer Vantiv LLC, said the magnetic stripe has served well for decades, but fraudsters have learned how to copy its contents. “It’s too easy to counterfeit … it just doesn’t work any more,” he said. Weingart also mentioned the increasingly discussed problem of Americans having trouble using their mag-stripe cards in EMV countries.

“I think the timing is right,” added Simon Hurry, senior business leader for global contactless and contact chip card programs at Visa, the network that started serious consideration of EMV in the U.S. last August when it unveiled its EMV incentives.

MasterCard and Discover later introduced their own EMV migration plans that mirrored Visa’s deadlines while differing on some points. But those programs have only generated a tidal wave of questions from merchants about costs, systems changes, and consumer reaction.

One big issue is whether the U.S. iteration of EMV will adopt the so-called “chip-and-PIN” version of EMV common in most of Europe. Visa’s plan de-emphasizes PIN-based authentication in favor of so-called dynamic authentication that uses one-time transaction identifiers, while MasterCard’s gives the PIN more weight. So far, merchant groups and executives from individual companies have come down fairly strongly in favor of the PIN, noting that PIN-debit cards have much lower fraud rates than signature-based cards.

“The ROI [return on investment] is simply not there without a PIN requirement,” said Horwedel, later commenting that “the signature card has by far has outlived its usefulness. It’s not the mag-stripe that’s the problem, it’s the signature that’s the problem.”

But Hurry strongly defended Visa’s stance, noting that the chip itself “is fully responsible” for providing the anti-counterfeiting defenses in chip-and-PIN cards. PINs became common on European chip cards, he said, because real-time authorizations either were unavailable or expensive. The result was that issuers often could not check “hot files” of lost or stolen cards. That’s not the case in the U.S., which has a telecommunications system that nearly always enables real-time authorizations and that will support dynamic authentication, according to Hurry. He also argued that PINs with chip cards are complex to manage technologically.

Horwedel, however, said merchants “are completely confused” by all the issues raised by EMV. “I’m telling you, merchants are going to be looking for other options,” he said.