Opinion & Analysis: Why Have Big U.S. Merchants Lost Their Enthusiasm for EMV?

Mark Horwedel

Heavy costs, unrealistic deadlines, and a looming threat to hard-won Durbin rights are just some of the reasons. The bottom line is the chip card standard badly needs an overhaul.

This question posed by the headline on this article seems to come up with increasing frequency these days, especially from the vendor community. They’re struggling to understand what happened to merchants’ once-strong interest in moving the Europay-MasterCard-Visa (EMV) chip card standard to the United States.

Frankly, the answer is fairly simple.

The EMV migration plans set forth by the big card networks look nothing like the plans followed in other global markets where EMV has been adopted. That means U.S. merchants are not getting what they expected based on the international experience, which in many cases provided at least some level of payback to merchants.

Merchants, after all, are the primary bearers of the significant costs associated with EMV upgrades at the point of sale. Instead, the networks are doing little to respond to merchants’ needs on this costly undertaking.

Costs And Confusion

U.S. merchants had good reason to be hopeful of a more balanced approach to EMV migration. Based on the experience outside the United States, merchants expected:

– A more uniform and predictable retail consumer experience throughout the world;

– Retirement of signature as an authentication method since it provides no value and is responsible for nearly all lost-and-stolen fraud;

– Eventual elimination or curtailment of the costly Payment Card Industry data-security standard (PCI);

– Financial support by way of reduced interchange or help with terminal upgrades;

– Better customer service through the use of offline PINs, which enable validation of the customer’s identity during interruptions in online service;

– A sunset date for the eventual elimination of the magnetic stripe.

Instead, under the present plan for U.S. EMV migration, none of these benefits is accruing to merchants, even though merchants will bear the vast majority of the costs.

But that’s not all. As part of the plan, Visa Inc. and MasterCard Inc. have established a completely unrealistic date for the shift of counterfeit card liability from issuers to merchants. This shift is currently scheduled to take place in October 2015 (October 2017 for petroleum merchants) and will apply to any merchant not prepared to accept EMV transactions.

This short timeline makes merchant compliance unattainable, especially since the networks have failed to agree to an acceptable solution to the Durbin Amendment’s debit card routing requirements. More about this a little later. (Also for more on the underlying issues, see “Durbinizing EMV,” March).

Despite the fact that liability-shift dates were extended in the countries that preceded the United States in implementing EMV, the failure to communicate this earlier in the world’s largest market creates unnecessary costs and confusion and poses the very real risk of denying merchants their Durbin routing rights.

The United States has the most complicated payments ecosystem in the world, yet U.S. merchants have been given the shortest timeframe for compliance. The fact is, none of the stakeholder groups, including Visa and MasterCard, has the resources to accomplish a full rollout by October 2015.

Deeply Concerned

It is true that merchants initially supported the transition from mag stripes to EMV. But many now believe that the card networks’ primary goal is not to eliminate fraud but to transfer costs from issuers to merchants.

If the networks were primarily interested in fraud reduction, they would eliminate signature as a card-verification method. And they would do something to address the shift to card-not-present fraud that comes inevitably with the introduction of EMV. They have done neither, despite the fact that these steps would help merchants justify this expensive, burdensome, and disruptive transition.

At the same time the current plan transfers EMV costs, it also threatens to undermine merchants’ rights under Durbin to have a meaningful choice in routing debit transactions. The Durbin Amendment, as currently interpreted by the Federal Reserve, requires each debit card to work on at least two competing networks, not two networks that happen to be owned by the same parent entity. This allows merchants to benefit from network competition for their transactions.

Even more routing choice could be introduced as a result of a federal court ruling this summer that threw out the Fed’s interpretation and replaced it with a requirement for at least two competing networks for each PIN transaction and at least two for each signature transaction. This is speculative for now, as the judge has stayed his ruling pending an appeal from the Fed.

But even the simpler routing rule in the Fed’s interpretation of Durbin introduces a problem. While merchants, issuers, and—to a lesser degree—networks agree in principle on how EMV should comply with Durbin, the fact remains that this is a wholly new endeavor for the EMV standard. EMV transactions have never been initiated by a card or routed by a merchant as provided for in the current Fed regulation, known as Reg II. And no Reg II-compliant EMV card has ever been issued.

Given the current state of affairs, merchants are deeply concerned about whether EMV can accommodate Reg II, much less whether it will do so as well as existing mag-stripe transactions do. This leaves many merchants in a position where they will likely be forced to choose to either retain their legal rights to manage debit routing or avoid the liability shift by implementing EMV.

A Complete Overhaul

Here, a few more words about the importance of offline processing are in order. One of the primary functions of EMV is to provide merchants the ability to accept payments securely when traditional online telecommunications channels are not available. But merchants and consumers in the United States are being denied this important functionality to soften the burden on U.S. card issuers.

Also, it needs to be emphasized that EMV does not address any of the fraud issues in either the m-commerce or e-commerce channels since it is restricted to the traditional brick-and-mortar channel. E-commerce merchants actually are dis-incentivized to promote EMV since history has shown that fraud migrates to the Internet when EMV is required at the traditional point of sale.

Even some physical-world venues face additional challenges. Table-service restaurants are looking to mobile payments to enhance the customer experience, drive loyalty and rewards, and increase customer-data protection. But the EMV tender experience is further challenged by the customary addition of tips after the original transaction and the retention of the EMV device during the payment process.

The facts are plain. To protect U.S. consumers, merchants, and the payment card network competitors of Visa and MasterCard—and to conform to existing U.S. law—EMV will require a complete overhaul.

Some of that work has already started. U.S. payments-industry stakeholders have come to terms on using a single application for debit on a card as a means to comply with Reg II’s routing rule. It’s now up to Visa and MasterCard to compromise with their debit-network competitors to make this a reality.

I cannot put this too bluntly: Until Visa and MasterCard agree to a viable routing solution and a more acceptable business case for merchants and consumers alike, merchants will not align with an arbitrary liability-shift date.

For years, the networks have forced PCI-compliance costs on merchants rather than address the underlying problems of an archaic, fraud-prone system. The introduction of EMV offers an opportunity to address these problems and to employ a more holistic approach that will address the needs of multichannel merchants.

Merchants now demand a solution that actually accomplishes these things—preventing fraud, addressing all channels of commerce, eliminating the use of signatures, eliminating magnetic stripes—in a reasonable span of time.

Mark Horwedel is chief executive of the Minneapolis-based Merchant Advisory Group. Reach him at mark.horwedel@merchantadvisory group.org.