Opinion & Analysis: Getting EMV on Board in the U.S.

Ashok Joshi, P.E.

Public transportation is a natural for contactless chip card payments, but issues remain, such as whether and when to use a PIN. The experience in London may hold some answers for U.S. deployments.

The payment industry is always trying to simplify the user experience while paying close attention to fraud management and cost control. Recently there has been considerable discussion about whether the United States should switch its fraud-prone magnetic-stripe credit and debit card system to the more-secure EMV-based (Europay-MasterCard-Visa specification) chip card.

The objective is to have either a contactless chip in cards so that transactions would be conducted with a tap rather than a swipe, or a contact chip card that is “dipped” into an EMV terminal.

Entry of a PIN usually is required to complete the transaction in EMV countries, though whether that authentication method would be the case in the U.S. is not certain.

Visa Inc. envisages EMV with dynamic authentication (one-time transaction identifiers), but MasterCard Inc. seems more oriented to chip-and-PIN while also endorsing dynamic authentication. Many merchants, electronic funds transfer networks, and processors strongly support the PIN. The issue is far from settled, and as we shall see, specific industries have needs that may argue against PIN entry.

Initially, U.S. EMV cards also would carry a mag-stripe to facilitate the transition to a fully chip-based environment, as EMV cards do in Europe. Chip-and-PIN systems are prevalent in Europe and some other countries in various stages of transition such as Canada. Initial reports indicate that fraud is declining.

The impact of any such switch would mean a huge change for American cardholders and merchants. There are many technical, operational, and customer-service issues involved. The question is whether such a change would be effective from both a cost and a convenience standpoint.

Intolerable Delays

Public transportation is a good place to start in examining the issues created by EMV chip cards. Transit demands fast throughput, and managers must deal with the lack of connection to a central computer system in on-bus transactions for a live fraud check. The lack of such a connection thus raises risk.

Despite the obstacles, a number of cities are planning to replace their proprietary chip cards and older mag-stripe fare cards with so-called open-fare chip cards, which are contactless, general-purpose cards compatible with the EMV standards.

In transit applications, fast throughput is essential for processing passenger entry and exit at a subway turnstile and on buses. Delays due to PIN entry will be intolerable if it takes longer than one second at most. So how can this issue for EMV in transit be mitigated?

Highlighted below are a few transit-industry authentication issues, followed by a work-around solution to adapt EMV by the Transport for London (TfL) system in the United Kingdom starting in May.

– Buses. Unlike rail stations with point-of-sale equipment, there is no suitable live connection to a central computer on buses. And the PIN entry typical of chip-and-PIN systems today would significantly delay the boarding process.

– Subways. Gated systems require very fast throughput. PIN entry at gate is not practical.

– Advance Sales. Typically 60% of public-transportation customers buy weekly or monthly passes or 10-ride tickets. Such payments are often funded through automated clearing house payments via employers or with top-up payments at vending machines or on Web sites. Some systems have successfully introduced the card networks’ Address Verification Service for vending machines to reduce chargeback costs.

Let us next consider the business case in London for switching to EMV. It is the best example thus far.

A tap-and-go entry with the TfL’s Oyster proprietary smart card at a London Underground subway turnstile is fast. It is the preferred method for subways to move the crush loads at peak periods. On the bus, it also is a tap-and-go operation. If one would have to tap, pause slightly and then enter a PIN in the future, it would be detrimental to throughput unless the overall transaction time is one second, at most.

Despite the proprietary Oyster card’s fast operations, TfL had expressed serious interest in how to process EMV chip-and-PIN card transactions for bus and rail operations. This matter was extensively discussed with various ISO standards committees and other experts. The result was to work out a special dispensation for public transport—PIN entry would not be needed.

The elimination of the PIN was a business arrangement wherein the bank card companies agreed to cover the potential risk of losing that first seen transaction charged to an EMV card that might produce a loss. The potential loss exposure ranges from $5 to $7, an average fare in London. But the upside would be attracting people who would not have to queue at the ticket windows, and convenience for occasional riders and tourists.

London had other savings to consider by shifting the payment process to bank cards from proprietary fare media. In 2003, riders had to use a magnetic paper ticket for their journey or buy a paper ticket on the bus. About 80% of all retail transactions took place at the ticket office, face to face with ticket sellers. Such a staff resource is very expensive and it means that the cost to the transit operator for selling a ticket was high.

But since 2003, more than 50 million Oyster smart cards have been issued and only about 10% of customers still make retail transactions at a ticket office. And EMV might automate fare purchases even more.

Today, London riders are very comfortable with the Oyster system. The Oyster smart card was the catalyst for this change. But this summer, Transport for London expects to introduce EMV card payment capability on all of its 8,500 buses. Use of PINs will not be required.

Reports from London say that TfL will be able to trade off some of the cost of operating the ticket system to the banking sector. One expects that part of that cost will most likely trickle over to the rider. It is sort of a convenience premium: you do not have to use it, but if you want it, you pay for it.

Interwoven Cost Drivers

This is a classic case of a situation where a large client, TfL, can make a deal so that the chip-and-PIN card does not need a PIN.

It’s highly advantageous to dispense with PIN-entry in a big-city transportation system, but getting approval for what looks like a simple change to established payment protocols is not a given. The average Joe the Plumber and corner-store merchant do not have any such leverage.

Where or when not to use the PIN with EMV chip cards is just one issue with open-fare payments in transit. Before moving America to EMV, networks, processors, banks, and public-transportation operators should consider many other issues, including:

– Implementing fraud-prevention tools such as the card networks’ Address Verification Service (AVS) for self-service vending machines. New York City’s transportation system is now using it in addition to other fraud-control techniques such as “velocity” checks to spot atypical purchase patterns. With AVS, customers must enter their ZIP code on file with their card issuer as a check. Information from New York indicates that AVS security has significantly reduced chargebacks.

– Consider management, customer education, staff training, and many other interwoven cost drivers.

– Think not just about standards and technology but also about the customer and the pocketbook, and even politics too.

Change management is never easy.

Ashok Joshi, P. E., is a fare-payment system consultant. Reach him at ajoshi43@msn.com.