By ALAN J. ORTBALS
Change is coming to the credit card industry and merchants need to be aware of the options and the risks.
“October 1, 2015, is the first landmark date in the gradual move from magnetic strip technology to chip-based credit cards,” said Phil Hickman, president of the St. Louis/Metro East Market of Associated Bank. “Right now, if something goes wrong, the credit card gets lost, stolen, etc. the liability rests with the bank or the card issuer. But, Oct. 1, if the merchant is not chip-card ready, the liability shifts to them. That’s why it’s so important for merchants to understand their responsibility and their risks. If the merchant is not properly equipped, they will own that responsibility and they really don’t want to be there.”
This new, chip-based technology is not really new. Known as EMV, the specifications were first developed in 1994 by three companies: Europay International (owner of Europe’s largest credit card operation, Eurocard) MasterCard and Visa. The United Kingdom was the first to move to EMV in 2001 and much of Europe has since followed suit.
Whereas the magnetic strip can easily be duplicated and then used for a raft of purchases, the microchip produces a new code for each transaction, according to Rob Schwartz, senior vice president of retail banking for the Bank of Edwardsville. While still subject to theft or loss, the EMV virtually eliminates the kind of wide-spread credit card fraud that hit Schnucks, Target and Home Depot in recent years.
Credit and debit card fraud in the United States was $11.27 billion in 2012 and it’s been growing quickly, according to a 2013 Nilson Report. Losses in the U.S. have been spiking because of the surge in use of credit cards, the antiquated magnetic strip technology used in America and Europe’s move to the EMV.
“There are 80 countries that are using chip card technology today,” Hickman said. “We are the last one. We represent about a quarter of the world’s credit cards but we account for about 50 percent of credit card fraud.”
The U.S. has been slow to embrace EMV because of the costs involved. According to a white paper published by the First Data Corp., America has 15 million point-of-sale devices, more than 360,000 automated teller machines, 609.8 million credit cards, and 520 million debit cards. Javelin Strategy & Research has estimated the total cost to replace all those POS (Point of Sale) terminals at $6.75 billion; an additional $1.4 billion to issue smart-chip-compliant cards; and about $500 million for ATM upgrades. It estimated the total cost of the switch-over at $8 billion — and that was a 2011 estimate.
The typical cost of a magstrip card to the bank is about 15 cents whereas the average cost to issue a chip-based card is $3.50. The average cost to the retailer for a new terminal is $500.
According to First Data, the impetus has finally reached America because of the rapid escalation of credit card fraud and because of a minor provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act. A last-minute amendment was added to that bill by Sen. Dick Durbin, D-Illinois. It cut debit card fees paid by merchants and chopped bank income from such transactions by about 50 percent. That put pressure on banks to reduce fraud.
According to Julie Conroy, an analyst with the Aite Group, a Boston-based financial consulting firm, “The revenue off the cards no longer can absorb the fraud hit.”
The move to EMV cards, however, will take time. Schwartz said the Bank of Edwardsville would be transitioning its customers over on a gradual basis, beginning with cards up for renewal. Aite Group estimates that 70 percent of U.S. credit cards and 41 percent of U.S. debit cards will be EMV enabled by the end of the year.
“One of the challenges for the U.S.,” Hickman said, “is that we have about 10,000 card issuers, over 1 million merchants that use some type of a card technology, and about 8 to 10 million POS devices that accept cards. All of that has to be changed. It’s going to take some time.”
Not all merchants are impacted by the Oct. 1, 2015, date. Those who sell motor fuel don’t see a change for two more years. In the meantime, cards will be issued with both the smart chip and the mag strip. In addition to the two-year rollout, there will probably be retailers who are simply reluctant to embrace the new technology, says Schwartz.
“There’s going to be a low adoption rate for the merchants to switch their credit card machines,” Schwartz said. “We’ll continue to issue cards with the mag strip because it’s going to take a while. October 1 is not a drop dead date where retailers can’t accept the old cards but the liability will shift. So, the retailer has a decision to make — do they want to invest in the new terminals or assume the risk?