I Want My EMV! (?)

August 14, 2013 at 8:00 am 3 comments

The vast majority of the banking world including Europe has now shifted to using credit cards which encode data in computer chips as opposed to magnetic strips.  This technology is called EMV (Europay, MasterCard and VISA).  The results are impressive.  A recent report by a banking security agency for the European Union reported a nearly 6% drop in card-related theft.  Furthermore, the report noted that the adoption of chip technology has only increased the attraction of the U.S. market to data thieves.  They aren’t stupid and when the largest credit market in the world uses outdated technology to protect against fraud you know where they are going to set their sights.

But the attraction of this technology goes far beyond its ability to deter data theft.  We are all hearing correctly that smart phone technology is here to stay.  The use of the EMV-chips helps facilitate smart phone transactions.  The same technology that allows someone to waive their cellphone instead of insert their debit card to pay for a transaction is facilitated by EMV-chips.  Furthermore, EMV has become the international norm.  Financial institutions are beginning to hear complaints from customers traveling overseas that their credit cards aren’t being processed properly.  It is no coincidence that the United Nations Federal Credit Union is among the largest proponents of this technology.  It makes sense to do what the rest of the world is doing.  Most importantly, by 2015 both VISA and MasterCard will begin shifting liability from acquiring banks to merchants who don’t adopt EMV-equipped Point-Of-Sale terminals.  However, the first implementation deadline set by VISA and MasterCard requiring acquirers and processors to have integrated EMV technology by April 2013 has come and gone and obviously much more needs to be done.

So, why hasn’t EMV taken off in America and can more be done to facilitate the transfer?  The answer to the first question lies in a classic economic conundrum.  For chip-based technology to work, all those point-of-sale terminals into which your current debit and credit cards are inserted have to be retrofitted to accept it.  That’s billions of dollars to the merchants.  That’s an awfully big investment and there is no guarantee that the acquiring bank will have the technology to process the transaction.  For one thing, it is estimated that shifting to EMV technology will cost banks billions of dollars and this is before they start retrofitting ATMs for the chip cards.  In addition, EMV-based debit and credit cards cost more to make and replace.  In other words, you have a classic chicken versus egg dilemma:  no one denies that chip technology is superior to the use of magnetic strips; but given the cost of investing in the new technology, no one wants to be the one to take the first leap.

Then there is the problem with regulations courtesy of the Durbin Amendment.  This is simply not a good time to be introducing new fraud prevention technology.  Since the Amendment we all hate caps the cost of fraud that financial institutions can have merchants absorb, it simply makes no sense, the argument goes, to invest in EMV.  So what’s to be done?  I hate to suggest regulations, but as we debate data protection issues and the best way to protect people’s privacy perhaps it is time for the Federal Reserve to learn from that erstwhile institution, the Central Bank of the Philipines.  Yesterday, it announced that it was mandating that its financial institutions have chip technology in place by 2017.  Given the importance of chip-based technology to the consumer payment system it is time for Congress and/or the Federal Reserve to consider imposing a similar mandate on both merchants and financial institutions in the United States.  Unless everyone has to bite the bullet. I don’t see sufficient incentives for the large-scale adoption of EMV technology for the next several years.  This is a long time to wait for technology that would help prevent a lot of fraud.

Entry filed under: Advocacy, Compliance, Regulatory. Tags: , , , , .

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3 Comments Add your own

  • 1. Ken W.  |  August 14, 2013 at 1:39 pm

    I have to disagree that “all POS terminals have to be replaced.”

    If you look closely, most of the newer POS terminals that were made within the past five years already have the EMV chip slot in place. Merchant A might’ve replaced their POS terminal last year and it could’ve already come pre-built with the EMV chip slot.

    Merchants also have to replace POS terminals anyway due to common wear and tear just like any other machine. It doesn’t have to be a turn-key “flick-of-the-light-switch” situation. Merchants differ from one to another. Merchant B’s POS terminal still has bout three years remaining on his/her terminal, and when they have to replace it three years down the road, it will be the EMV chip slot type.

    The common mistake is that “all merchants have to replace all of their terminals all at the same time and that’s too costly.” No, it isn’t. Some merchants may already have them already because when they last replaced them, it already has the feature but it’s just not in use yet. Other merchants can keep their old terminals until end-of-life like any other machine and when the time comes to replace them, the market will already be full with an all-in-one mag-stripe+EMV chip reader+contactless card reader type POS terminal as their new replacement gear.

    • 2. Henry Meier  |  August 15, 2013 at 2:16 pm

      Ken thanks for the comments and I hope you are right but estimates as to how long your average merchant will wait before upgrading a POS terminal vary to as high as 6 years. The truth is no one knows for sure. Given this uncertainty I think your average financial institution is going to wait and think long and hard before investing in EMV technology

  • 3. Shannon  |  August 16, 2013 at 10:11 am

    I agree wiht Ken. Most technology or hardware only has a shelf life of 3-5 years. As merchants are replacing these machines they should spend the extra to make sure they’re compliant now so as not to have to do it again before the life span runs out.

    However, with the support and patches ending for windows XP and the migration to Windows 7, many institutions will be replacing hardware sooner then later. Just the upgrade to our ATM machines for Windows7 and the EMV card readers, we’re looking at over $20k.

    Institutions just need to make sure when they’re thinking about this migration, include the EMV technology. It will be cheaper then trying to add it later….


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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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