Warning: The EMV Chip Card Conversion Will Be Slow and Fraught With Peril

The conversion of U.S. payment cards from the aging magnetic stripe to the Europay-MasterCard-Visa chip card standard will hardly be a seamless transition. That’s the word from a payments researcher and Canadian retail experts who spoke on a panel at a payments conference Tuesday near Chicago.

The warnings came a year ahead of the card networks’ October 2015 U.S. liability shift, which will assign liability from point-of-sale card transactions for any resulting counterfeit fraud to the party in the transaction—card issuer, merchant or acquirer—that doesn’t support EMV.

“We’re in a real bad situation,” said Nick Holland, senior analyst and leader of the payments practice at Pleasanton, Calif.-based Javelin Strategy & Research. “The U.S. … is woefully unprepared for next year in most respects.”

Recent Javelin research has found that only 1.5% of an estimated 1.2 billion U.S. payment cards have an EMV chip, and 10% of merchant terminals are EMV-enabled. Most of these terminals are at big-box stores. Javelin says just one in five small merchants is EMV-capable today. The reason small businesses are not rushing to buy EMV terminals is that despite highly publicized data breaches, the frequency of card fraud has not increased dramatically, according to Javelin.

Although U.S. banks have been giving EMV chip cards to international business travelers for several years, they’re only now starting to issue chip cards to their broader cardholder bases. Last week Bank of America Corp. announced that it would soon embark on mass EMV debit card issuance.

BofA is the first big bank to announce a full-bore EMV conversion. The industry-wide card conversion will take some time: Javelin predicts only 29% of credit cards and 17% of debit and prepaid cards will be EMV-enabled in December 2015. At that time, Javelin predicts 53% of POS terminals will support EMV.

Holland said awareness of EMV among small businesses is still low, although probably higher than it was a year ago when Javelin found that 53% of more than 200 small businesses surveyed either had no or limited knowledge of EMV.

Merchants need to know EMV in detail lest they overpay for chip card processing hardware and software, according to Stephen Braceland, chief executive of STJ Retail Corp., a Concord, Ontario, consultancy and system-services provider for retailers. Canada began its EMV conversion about five years ago. Some retailers have paid “four to six times” what others have paid for EMV infrastructure “to do exactly the same thing,” Braceland said.

Consumers, meanwhile, reportedly have limited awareness of chip cards, the remedy for which is advertising and education by card networks and banks. Panelist Dee O’malley, senior director of payment acceptance at electronics retailer Best Buy Co. quipped that she’d recently seen “$100 million” in commercials for Visa Inc.’s new Visa Checkout service. “I would love to see $100 million of EMV commercials,” she quipped.

Catherine Johnston, president and chief executive ACT Canada, a non-profit payments and secure-identity association based in Ajax, Ontario, said the U.S. should brace itself for surprises during the switch to EMV. “We uncovered things we never suspected would happen,” she says.

One possible U.S. problem she cited: glitches in routing EMV transactions over the PIN-debit networks as required by the Dodd-Frank Act’s Durbin Amendment, despite accords the networks have reached with Visa Inc. and MasterCard Inc. this year designed to facilitate smooth routing.

A certainty, she said, is a rise in international fraud that could more than offset the EMV-induced decrease in counterfeit fraud. That’s happened in Canada, and it’s mostly a result of fraud on the mag stripes that still are included on EMV cards as back-ups for when chip-based service is unavailable or not working. Johnston said she’s had three EMV chip cards replaced because their mag stripes were skimmed (probably at ATMs although she’s not certain) and the data later used to commit card fraud in the U.S.

In order to eliminate such fraud, Canada’s Interac debit network next year plans to eliminate fall-back to the magnetic stripe, Braceland said.

The panelists spoke at the Mobile Payments Conference—Mobilizing Retail event in Skokie, Ill. EMV technology is closely associated with the emerging mobile-payments sector.