Trends & Tactics

You Said How Many EMV Cards?

The conversion of U.S. magnetic-stripe credit and debit cards to the Europay-MasterCard-Visa (EMV) chip card standard is finally under way, but just how quickly most Americans will be carrying smart cards is a matter of debate.

Citing reports from industry suppliers, the EMV Migration Forum, an affiliate of the Smart Card Alliance trade group, last month predicted more than 100 million EMV payment cards would be issued, and 4.5 million EMV-capable point-of-sale terminals would be installed at merchant locations, by year’s end.

A few days earlier, Aite Group LLC issued a report forecasting that 25% of U.S. credit cards and 8% of debit cards will have EMV capability this year. With Americans in 2013 carrying an estimated 579 million general-purpose credit cards and 597 million debit cards, Aite’s projections mean that about 193 million cards soon could be EMV-enabled.

By the end of 2015, just after a major EMV deadline, Aite estimates 70% of credit cards and 41% of debit cards will be converted. That works out to about 650 million cards, assuming no change from the 2013 base.

Aite’s research is based on recent interviews with payment card network executives and 18 of the top 40 credit card issuers representing 56% of the U.S. credit card base, including seven of the top 10.

In contrast, a May report from Javelin Strategy and Research predicted that only 166 million credit cards and 105 million debit and prepaid cards would be EMV-enabled by the end of 2015 (“Welcome to the EMV Doldrums,” June).

While the estimates vary, the more important issue is why and how the U.S. card industry is converting to EMV, a 20-year-old standard established in more than 80 countries. Both issuers and merchants face October 2015 network deadlines that will shift liability for counterfeit card fraud to the party in a transaction not equipped for EMV. Gas stations have until October 2017.

The liability shift is the most obvious reason for the coming profusion of EMV cards, which are effective in thwarting counterfeiting. But also lighting a fire under U.S. issuers is that chip cards’ gains elsewhere have made U.S. mag-stripe cards, which are easy to counterfeit, a favorite target for fraudsters worldwide.

Aite says the U.S. credit card fraud rate is now 10 basis points of purchase and cash volume, double 2007’s rate. That translates into about $6 billion a year in losses.

“Ten basis points is a motivator,” says Julie Conroy, research director at Boston-based Aite.

Then there is the boom in online fraud, for which EMV cards provide no special protection. Online fraud has spiked in countries where POS fraud became tougher to commit. Aite predicts U.S. online fraud losses will more than double from current levels to $6.4 billion in 2018.

Thirteen of Aite’s 18 issuers favor chip-and-signature authentication for credit cards over the chip-and-PIN authentication common in some EMV countries. The reason, according to Conroy, is that almost no one in the United States today uses a PIN with credit cards.

“Nobody wants to have the most cumbersome consumer experience and risk their card going to back of wallet,” she says.

All of Aite’s issuers, however, said they plan to use chip-and-PIN for debit cards.

—Jim Daly

Where Remote Capture Raises a Red Flag

The technology to deposit checks into prepaid cards or mobile wallets using a smart phone is less than two years old, but already the channel is proving to be 33 times more prone to fraud than mobile deposits into bank accounts.

That’s according to data from Fidelity National Information Services Inc., which studied the practice as part of a broader report on check cashing that it released last month along with the Chicago-based Center for Financial Services Innovation.

The data on mobile deposit for prepaid cards and wallets cover the year from October 2012 to September 2013 and rely on data supplied by FIS’s Certegy Check Services and ChexSystems units.

Overall, some 10% of consumers who have used mobile deposit to load a prepaid card or mobile wallet have triggered a fraudulent return, most often resulting from counterfeit or duplicate items, according to the report.

By contrast, the corresponding percentage for mobile deposits into bank accounts is 0.3%, Jacksonville, Fla.-based FIS says.

With mobile remote capture, a consumer or business uses a smart-phone camera to snap an image of the front and back of a check, then sends the image to the bank for deposit. Because the user retains the paper original, there is a risk of duplicate presentment. Also, users could image fake checks.

Experts have long contended the actual risk of fraud for mobile deposit into bank accounts is relatively low, and indeed various studies have substantiated that claim.

But remote deposit of checks into prepaid products and digital wallets is a much newer, and less understood, channel where the credit qualifications, deposit limits, and other controls imposed by banks are generally absent, says Aaron Calipari, vice president of product management and market development for FIS.

“What the market is doing at this point is letting everybody have access to this [service],” he says. “And we are starting to see the results.”

While it’s true that many consumers who use the service are unbanked or underbanked, that alone doesn’t explain the elevated risk, Calipari says. “It’s a completely different population from what we would see depositing into a bank account,” he says. But even so-called good consumers—people who have passed various underwriting routines—tend to go astray. “You see [them] behaving badly in this channel,” says Calipari. “Either they don’t know or don’t care.”

Mobile deposit into prepaid products and wallets is also riskier than other check-cashing channels, the FIS data show. The report uses the volume of consumers triggering demand-deposit inquiries in the past three years and forced account closures in the past five years as proxies for risk.

By these measures, mobile remote capture scored highest, with 66% of consumers experiencing inquiries and 59% sustaining account closures. Still, the higher risk in mobile deposit is mitigated by its average ticket, $161, compared to a $452 average for all check-cashing channels.

Nonetheless, not all remote-capture experts are convinced by the FIS study. They fault the report for what they see as a bias in its sample set toward risky users.

“You’re looking at the riskiest of the riskiest customers out there,” says John Leekley, chief executive and founder of RemoteDepositCapture.com, an Alpharetta, Ga.-based research company. “It’s like going into a prison and asking, ‘How many of you have a criminal record?’ Of course the risk is higher. More analytics are needed to see how big or how little that risk is.”

Leekley also says the study would have been more useful if it had reported fraud loss by funds availability. Some products offer immediate availability, while others require a waiting period of several days. “Where the risk really increases is in dealing with higher-risk customers who want immediate access to funds,” he says.

—John Stewart

Affirm: E-Commerce on the Installment Plan

In the battle for online sales, what’s often overlooked is the ability of the consumer to actually pay the full amount at the time of the transaction. That’s where transactional credit comes in. It’s a challenging business requiring close attention to funding costs and their impact on the credit provider’s balance sheet.

The latest startup in this game is Affirm Inc. The 2-year-old San Francisco company launched its commercial deferred-payment service for e-commerce earlier last month and was set to soon introduce an installment-credit product that will let consumers buy online and then make equal monthly payments.

Affirm has a lot riding on the installment service, which it calls Split Pay. “There’s really nothing out there like it,” says Brad Selby, the company’s chief revenue officer. “That’s what we’re focusing on.”

It helps that Affirm, which is run by chief executive Max Levchin and a handful of other executives whose experience includes time at PayPal Inc. in its early days, has raised $45 million so far from venture firms Khosla Ventures, Lightspeed Venture Partners, and Nyca Partners.

The problem the startup says it’s addressing is the consumer who has been left behind by traditional credit-vetting tools, such as FICO scores. Selby says Affirm is convinced there are thousands of consumers with good credit whose scores tanked when they made a few late mortgage payments in 2008 or later.

But he’s tightlipped about what data Affirm looks at to measure risk. “We tend not to talk too much about specific databases,” he says.

Users can sign up for Affirm at checkout by filling in a few bits of information, including name, mobile number, and date of birth. Affirm pays Web retailers in full when consumers check out, then lets the consumers pay the balance 60 or 90 days later.

Interest in most cases starts at 6%, while merchants pay a transaction fee of 2% to 3% of the sale amount. “We keep [the merchant fee] at what they’re used to from interchange,” Selby says, though lower rates may be coming. “We certainly find interchange is a sore subject,” he says. “We have aspirations of driving that rate down significantly.”

Split Pay works similarly, except that consumers have the option of making three to four equal monthly payments to pay off the balance. Later this year, Affirm will begin offering terms as long as six to 12 months, Selby says.

Affirm is targeting small online merchants selling larger-ticket or aspirational items where readily available credit might yield higher conversion rates. Target categories include furniture, home improvement, sporting goods, and apparel.

So far, between 40 and 50 merchants have signed up to accept Affirm payments, but the company hasn’t set any goals, Selby says. “We’ve been pretty cautious about establishing goals,” he says. “We’ve just started to sign people. The next tranche of merchants will help us understand the velocity at which we’ll sign merchants.” The startup has been signing consumers, as well, though how many so far is unknown.

Online merchants are likely to give Affirm a warm welcome, but only if it can deliver on its promise of higher conversion rates and average order values, says Adil Moussa, principal at AdilConsulting, an Omaha, Neb.-based consultancy focused on merchant acquiring.

Not all consumers have cards, Moussa points out, and not all small merchants can offer private-label credit, so a spot-credit program could have powerful appeal.

Also, the company’s transaction pricing may mimic card interchange, but it likely won’t be an issue if the service delivers incremental sales, Moussa says

But the profusion of alternative-payments providers in recent years has left many online retailers skeptical. “After a while, you just have to show the [return on investment],” he says.

Much also depends on how Affirm chooses to distribute its service. For now, the company is dealing directly with merchants, which integrate its application programming interface. It’s also integrating with e-commerce platforms, including Celery, Magento, and Spree Commerce.

—John Stewart