Interchange Relief And Other Carrots Needed To Spur U.S. EMV Conversion, Analyst Says

Europay-MasterCard-Visa (EMV) chip cards will come to the U.S., but probably not before the payment card networks postpone current deadlines and offer strong incentives for merchants that might include interchange relief and dumping the signature as a cardholder- verification method, according to a new research report from Celent LLC. Card issuers, meanwhile, are likely to take a cautious approach in replacing their hundreds of millions of magnetic-stripe debit and credit cards rather than doing “big-bang” mass re-issuance in a short time.

Those predictions are contained in Celent’s “EMV Migration in the U.S. Progress Report—What Progress?” by London-based senior analyst Zilvinas Bareisis. In it, Bareisis notes that Visa Inc., the largest card network, started the U.S. EMV ball rolling in August 2011 when it laid out its plan for an EMV conversion. After that, the other major networks issued their own so-called “roadmaps” that largely mirrored Visa’s key components and deadlines. The networks want the U.S. to get in step with the rest of the world, where EMV cards, which are much less vulnerable to counterfeiting fraud than mag-stripe cards, are now widespread or soon will be. The report also notes that interoperability between U.S. mag-stripe cards and the international EMV infrastructure is becoming an issue.

So far, however, EMV hasn’t made much visible progress. Bareisis cites a Visa report saying its U.S. banks and credit unions had issued 3.5 million EMV cards as of the first quarter. While more than triple the 1 million cards in issue in 2011, EMV cards still account for just 0.5% of Visa’s total card base of 660 million credit and debit cards.

Perhaps the biggest looming deadline comes in October 2015, when most merchants are supposed to be able to process EMV transactions. If not, the networks will shift liability for any fraud arising from a transaction from the issuer to the merchant. Automated fuel dispensers, because of their complexity, get until October 2017 before the liability shift applies to them.

The cost and operational hassles for retrofitting about 8 million card-accepting locations in the U.S. have had merchants grumbling about EMV conversion since 2011. Many say that fraud rates, about 0.085% of transaction volume in 2010, are not high enough to justify the conversion costs. Merchants also cite the cost of training their employees for EMV transactions.

Despite merchant resistance, “We think that too much has already been put at stake for EMV not to be implemented in the U.S. at all,” the report says. “However, lack of progress to date means the liability shift dates realistically are not going to be met, and we think they will be pushed out.”

Bareisis tells Digital Transactions News that he has no direct intelligence from the networks that the October 2015 liability shift will be changed, but he bases his prediction on signs from the networks. For example, at last month’s ATM, Debit and Prepaid Forum in Las Vegas, a MasterCard speaker seemed to be firm on sticking to the deadline, but Visa “seemed to be more open,” he says.

With the liability shifts amounting to a stick, Bareisis says merchants need bigger carrots than currently offered in the roadmaps, such as Visa’s waiver of its requirement for annual validation of compliance with the Payment Card Industry data-security standard (PCI) if 75% of a merchant’s Visa transactions originate from EMV-compliant terminals that support both contact and contactless chip cards.

“Frankly, we don’t think this is enough, especially given all the concerns merchants have,” the report says. “We think the networks will have to offer additional positive incentives to merchants.”

These incentives could include interchange relief for EMV transactions, as has been implemented in the United Kingdom. Another might be mandating the use of PINs for chip card transactions and elimination of signatures, which many merchants deride as a weak cardholder verification measure. The report also says that the networks may also need to show merchants that they are “demonstrating concerted efforts to solve e-commerce fraud,” against which EMV offers no better protection than mag-stripe cards. Bareisis notes that recent network initiatives for transaction tokenization are moves in that direction.

On the issuing side, banks and credit unions have a host of issues to tackle, including replacing mag-stripe cards with chip cards that, while their costs are coming down, still cost four or more more times more than the old ones. They also must solve the vexing operational problem of reconciling chip cards with the transaction-routing requirements in the Dodd-Frank Act’s Durbin Amendment, which wasn’t a problem with mag-stripe cards. So far, U.S. issuers have mostly given EMV cards to international travelers.

“Credit card issuers will adopt a cautious, segmented, and gradual approach to EMV migration,” the report says. “‘Big-bang’ migration is unlikely to be feasible for all but the smallest issuers.”