Most Acquirers Support EMV Programs, But April 2013 Deadline Has Them Nervous

The re-terminalization of the merchant point of sale to accept EMV chip cards could generate more than $6 billion in revenues for independent sales organizations and other merchant acquirers, but the changeover is fraught with competitive and operational risks, according to a new research report by Aite Group LLC.

Aite last month surveyed payments executives from 20 ISOs and bank-owned acquiring operations about the payment card network programs to migrate the U.S. from old magnetic-stripe credit and debit cards to the newer EMV chip cards now common in most industrialized nations. Although the respondent base was small, Aite says its data still provide a good directional indicator of acquirer thinking because many of the respondents came from major industry companies.

Although only 26% of the respondents disagree or completely disagree with the networks’ programs, Aite senior analyst Adil Moussa says acquiring executives still are “torn” about EMV migration. “Most of them see it as a good thing,” he says. “The only problem they have is with the date that they have to comply with, that is April 2013. That is a very severe deadline.”

Some 35% of respondents said they don’t expect to meet the deadline, only a year away, while 50% expect to be EMV capable on the deadline and 15% before it.

The programs, now widely viewed as mandates even though the networks haven’t used that term, began with Visa Inc.’s last August. That’s when the No. 1 network outlined a multifaceted plan that set the April 1, 2013 deadline for processors and sub-processors to be able to process EMV and near-field communication (NFC) transactions, the latter of which can be used for mobile payments. Come October 2015 (October 2017 for fuel merchants), liability for counterfeit transactions will shift from card issuers to merchants if the merchant processes an EMV card transaction on non-EMV-capable equipment.

MasterCard Inc. and Discover Financial Services followed with their own EMV programs that, while differing from Visa’s in emphasis on some issues such as PIN versus signature authentication, largely mirror Visa’s deadlines.

“The other thing they’re frustrated with is how many different mandates they have to comply with,” Moussa says. Those include the new merchant reporting forms (1099-K) for the Internal Revenue Service, yearly changes in various network rules or requirements, and compliance with the Payment Card Industry data-security standard (PCI). Visa and MasterCard’s big carrot: relief from annual PCI validation for merchants generating 75% or more of their transactions from chip-enabled terminals.

Based on data from its respondents, Boston-based Aite estimates that only 3% of U.S. merchants already are equipped with EMV-ready terminals. Manufacturers will charge an estimated $5.48 billion to supply EMV terminals for the millions of merchants who will need them, offset by about $300 million in pricing incentives that will go mostly to the big processors, according to Moussa.

On the flip side, ISOs and acquirers will be able to charge an estimated $6.79 billion for the new equipment, although Aite predicts they’ll subsidize merchants to the tune of $1.69 billion through free or reduced-price terminals in some cases. Some 55% of the respondents see their biggest EMV opportunity in revenues from new POS devices, while 35% foresee EMV as creating opportunities to compete for merchants and 35% look forward to better data security and less fraud.

Another big opportunity, cited by 30% of respondents: the chance to finally get rid of old POS technology in an industry where equipment tends to keep going and going, including dial-up and non-PCI-compliant terminals.

The risks, however, include pricing mistakes at a time when everyone will be trying to sell new stuff to reluctant merchants. Forty-five percent of respondents cited the “disruptive nature” of EMV as the top threat during the transition to chip cards and NFC. Another 40% cited EMV’s potential to generate merchant attrition.