Payments Views

Card Fraud

The Case for EMV Chip Cards in the US?

In one of my prior lives, I made the phone call that triggered what eventually became the industry standard for chip card deployment now known as EMV (Europay-MasterCard-Visa). That call was made almost 20 years ago.

At the time, I was at Visa where we were spending a lot of energy on the development of proprietary chip card technologies (e.g., the Visa Super Smart Card). Our counterparts at MasterCard, of course, were trying to do the same.

While we were actively developing these technologies at Visa, we were under increasing pressure from the French banks and payment card industry to adopt their chip-based technologies as a global chip card strategy.

What became obvious was that separate card association efforts to develop proprietary chip card technologies weren’t going to result in an industry solution that made sense. Instead, what was required was a coordinated effort to define the new standards – and that insight led to that phone call that I made and, ultimately, to what became EMV.

The Smart Card Alliance has just published a new white paper titled “Card Payments Roadmap in the United States: How Will EMV Impact the Future Payments Infrastructure?“. It’s perhaps the most concentrated look at the issues and opportunities associated with deploying EMV-based chip cards in the US market that’s been published publicly – a very articulate examination of the issues involved and how the various stakeholders might be affected by such a migration to EMV in the US.

We sit at an interesting point in the evolution of electronic card-based payments. In the US, the business case for implementing EMV-based chip cards remains very challenging. While the SCA’s white paper alludes to fraud trends, the reality is that the break-even for a complete migration is a long time – we might debate exactly how long.

Meanwhile, in other markets with much more concentrated stakeholders, migration to EMV is either underway or complete. First lesson: a small group of decision makers makes for an easier migration decision.

Unfortunately, in a world of global payment card acceptance, country-level decisions about card technology are clearly suboptimal – yet they are today’s reality. The SCA white paper says:

“The adoption of EMV chip cards and POS terminals in the United States would have a dual benefit. Not only would American merchants, acquirers and issuers benefit from smaller losses and improved cost management controls, but all EMV-enabled issuers globally could experience reduced losses and decreased operational impact from payment card fraud.”

Indeed.

And, if the global payment card community could just agree to move completely to chip and remove magnetic stripes from all cards, all of the fraud reduction benefits could be achieved.

Meanwhile, card fraud losses can be expected to move to those countries who are the last to adopt EMV – and card issuers, who have invested in the card technology of EMV, will be increasingly pressuring non-EMV acceptance markets to adopt.

This is squarely where we sit today in the US. Some US cardholders are experiencing declines when they present their non-EMV cards to merchants in EMV countries. This isn’t supposed to happen – but it does.

Yet, US issuers and the major card networks can’t really make decisions to invest in EMV because the business case still doesn’t make sense. And, once again, unilateral action by one card network to embrace an EMV migration doesn’t make sense. Large merchants who are pushing for EMV in the US as a scope reduction initiative related to PCI are frustrated that the card industry won’t invest in this change.

The Smart Card Alliance paper lays many of these issues out in detail – and kudos to the Alliance for stepping up and orchestrating a coherent response to these issues. At the end of the day, the case is still not clear cut. The concluding section of the paper doesn’t clearly articulate the case for change. Rather, it notes that migration today – as a late follower vs other countries around the world – “will be less complicated that it would have been a decade ago.” Let’s hope so – that we’ve learned something from earlier deployments.

But, where is the still elusive positive case to move forward? What role might the Fed play – now that it has some oversight with result to card fraud – at least regarding debit cards?

And what about mobile payments? Don’t we all want to just tap our phones to pay?

What are your thoughts? Please share them in a comment below – or send me an email and we can find time for a private conversation!

[Update: Feb 9, 2011 – Visa announced a new Technology Innovation Program (TIP) that “will eliminate the requirement that eligible merchants annually validate their compliance with the PCI DSS for any year in which at least 75 percent of the merchant’s Visa transactions originate from chip-enabled terminals. To qualify, terminals must be enabled for contact or dual contact and contactless interface chip acceptance.” But the program does not apply in the US market because “it is not feasible or appropriate to drive the market toward major infrastructure investments, especially in an environment where financial institutions could lose billions in revenue as a result of the regulation” according to Visa.]