Special Report: Pass the Ketchup, Please

Chip card acceptance is far from ubiquitous six months ahead of the U.S. liability shift.

As October’s big EMV liability shift approaches, just how ready are U.S. merchants to accept the chip cards that are so common elsewhere in the world?

Estimates vary, but as of early spring the state of readiness could be summarized as “not very high.”

“Like a famous ketchup commercial of a few years ago, ‘anticipation’ seems to be the word here,” says Randy Vanderhoof, executive director of the Smart Card Alliance, a trade group based in Princeton Junction, N.J. “It’s a slow drip.”

Visa Inc. reported that as of last September, nearly 79,000 merchant locations were wired and ready to accept EMV cards. That number had grown to 100,000 locations by year’s end, according to Stephanie Ericksen, vice president of risk products at Visa. Many more than 100,000 point-of-sale terminals undoubtedly are live for EMV because one location could house multiple terminals.

Still, in a country with 9 million to 10 million POS terminals, 100,000 locations isn’t much to celebrate. “It’s a drop in the bucket,” says Patty Walters, senior vice president of EMV corporate strategy at Vantiv Inc., a big payment processor based in suburban Cincinnati. She adds, however, that an enormous amount of EMV prep work is going on behind the scenes.

‘The Big One’

Part of the difficulty in assessing the current state of EMV readiness arises from payment-industry nomenclature: are you counting the number of EMV terminals in a particular location, or just the location if it happens to be EMV ready?

Then there is the question of how many chip card terminals are turned on. Terminal makers have been selling hundreds of thousands of EMV-enabled devices over the past year, but relatively few of them actually have the required software downloaded and are ready to process chip card payments today.

EMV terminals currently are most likely to be seen at national retail and restaurant chains. Paul Galant, chief executive of leading U.S. POS terminal maker VeriFone Systems Inc., told analysts last month that his company estimates 70% of the 1.8 million POS terminals at the nation’s top 200 retailers supported EMV as of October 2014 and 90% will be enabled by October of this year.

By “support,” Galant means the devices are capable of running EMV transactions, but aren’t necessarily wired and turned on to accept chip cards.

Of approximately 460,000 terminals at mid-tier retailers (ranked 201 to 1,000), 37% supported EMV in late 2014 and close to 60% will by October, according to Galant.

The presence of EMV terminals drops way off at small and mid-size businesses (SMBs). VeriFone estimates that only 22% of what the company believes are 6.8 million lanes in SMB locations supported EMV late last year, but close to 40% will by this coming October.

“SMB is the big one,” Galant said.

Scrambling To Meet Demand

Some acceptance categories, such as large hotels and other hospitality merchants, have even lower levels of EMV enablement. Others, particularly gasoline pumps, have virtually no EMV penetration yet, Galant said.

Fuel retailers have until October 2017 before they face an EMV liability shift at the pump (though any terminals inside their stores are subject to this October’s deadline).

In all, about a third of the estimated 10 million POS terminals were enabled for EMV as of last October and 52% will by this coming October, according to Galant. He added that another 3 million card-accepting “greenfield” lanes currently served by card swipes or keyboards could be outfitted with EMV terminals.

VeriFone, Ingenico S.A., and other POS terminal makers are scrambling to meet demand for EMV terminals as the liability shift approaches. Boosted in part by strong U.S. sales of EMV equipment, VeriFone saw its North American revenues for the quarter ended Jan. 31 jump 31% to a record $160.3 million.

‘A Hybrid Environment’

Assessing EMV readiness gets even more complicated when viewed through the lens of contact vs. contactless payments. Apple Inc. chief executive Tim Cook said in March that nearly 700,000 U.S. merchant locations, many of them vending machines, now accept the Apple Pay mobile-payment service, compared with 220,000 terminals when it launched last October.

Since Apple Pay relies on near-field communication (NFC) contactless technology to enable Apple’s iPhone 6 and iPhone 6 Plus smart phones to communicate with point-of-sale terminals, Cook’s disclosure appeared to signal that contactless payments are undergoing a rapid ramp-up as the U.S. converts to EMV.

EMV comes in two major varieties for in-store payments: so-called “contact” transactions, in which a chip card is inserted, or “dipped,” into a terminal, and contactless payments, in which an EMV card, or a smart phone with a mobile-payment app, is passed close to, or tapped on, an EMV terminal.

Most banks and credit unions are expected to issue contact cards in EMV’s early going rather than the more-costly dual-interface cards that support both types of transactions (“A Contact Sport,” February).

Most EMV-enabled terminals, however, can handle both types of payments provided they have the proper software. In other words, EMV could also boost mobile and contactless card payments, particularly at merchants that value very fast transactions, such as quick-service restaurants and transit agencies.

Visa’s Ericksen notes that some locations that accept contactless payments do not generate transactions that support the EMV cryptogram. As the EMV conversion goes on, however, more and more contactless transactions will be bona fide EMV payments.

“As we move forward, merchants will want to support dual interface,” Ericksen says. “We’re in a bit of a hybrid environment.”

‘Cramming’ for the Exam

One thing that’s clear is that in addition to hardware and software deployments, certifications, and other work that goes into making EMV a reality, merchant acquirers have a lot of education to do.

A February survey of more than 990 independent business owners by Newtek Business Services Inc., a provider of payment processing, loans, and other services for small businesses, revealed that fully 71% of respondents were unaware of the October liability shift.

Barry Sloane, president and chief executive of New York City-based Newtek, likens the low level of merchants’ EMV awareness to college students who don’t do much studying until test time approaches.

“There’s always a fairly significant portion of students that didn’t do anything on their lessons, and cram for their final exams,” Sloane says. “I think that level of awareness will pick up.”

 

—Jim Daly