PCI Waiver Expected To Spur Merchant Adoption of EMV Terminals

Despite just 10% of U.S. merchant terminals being capable of accepting EMV chip cards today, 60% of all terminals likely will be EMV-enabled by 2015, according to a new report from Javelin Strategy & Research. Javelin also expects U.S. issuers will convert the bulk of their credit, debit, and prepaid cards to the EMV chip between 2014 and 2017. Currently less than 1% of credit, debit, or prepaid cards in the U.S. are EMV-chip enabled.

A major incentive expected to drive adoption of EMV terminals is Visa Inc.’s decision to waive annual validation with the Payment Card Industry data-security standard (PCI) for merchants with at least 75% of their card transactions processed on EMV terminals. Visa still expects merchants to meet PCI’s requirements. The opportunity to further reduce fraud losses through EMV compliance is another major incentive.

“For merchants that manage their own card acceptance internally, PCI DSS can be a substantial expense, and eliminating that expense by deploying EMV terminals is an incentive,” says Beth Robertson, director of payment research for Pleasanton, Calif.-based Javelin and lead author of the report. “Wal-Mart has converted all its POS terminals to be EMV compliant in part to eliminate the PCI DSS requirement. The 75% transaction threshold is not just for EMV cards, but all cards.”

EMV–which stands for Europay, MasterCard, Visa, the three companies that created the standard–secures cardholder information at the point of sale by requiring that the terminal validate itself to the card’s chip by communicating with secure elements within the chip before any account information is transmitted between the two. In many EMV countries, cardholders also must enter a PIN to validate the card to the terminal, although the few EMV cards issued by U.S. banks so far rely mostly on signature authentication.

The 60% of merchants expected to deploy EMV terminals by 2015 likely will be large, so-called Tier 1 merchants. The remaining 40% of merchants expected to convert afterward will be smaller merchants likely to follow the replacement cycle for legacy terminals, and gas stations, which the networks gave a 2017 deadline for conversion. Merchants not meeting the conversion deadlines will bear the liability for fraudulent card transactions made in their stores.

“Major merchants have a lot of terminals, so when any one of them converts, a larger portion of the terminal base becomes EMV compliant. That’s why the 60% threshold will be met so quickly,” says Robertson.

As merchants broaden the EMV terminal base, Robertson expects issuers will ramp up efforts to put chip cards into circulation to avoid bearing the brunt of liability for fraud on magnetic-stripe cards. “As EMV card portfolios grow, fraud is going to shift to mag-stripe cards and it is unlikely card issuers will want to shoulder the liability once the deadlines for conversion kick in,” says Robertson.

While avoiding higher fraud losses is expected to be incentive enough for many issuers to put EMV cards into circulation, Robertson adds that some issuers might need a financial incentive to help offset the cost of chip cards, which can cost up to 10 times more than mag-stripe cards.

“There are a lot of banks of varying sizes in the U.S. and all of them are trying to figure out how best to move to EMV, and some might need an incentive beyond fraud reduction to move to EMV sooner, rather than later,” says Robertson.