Will That Be Chip And PIN Or Chip And Signature? Expert Forecasts EMV Confusion

Payments executives already know the coming changeover from magnetic-stripe cards to chip cards using the Europay-Visa-MasterCard (EMV) standard will be expensive—about $11 billion, according to a new report from Aite Group LLC. But Aite notes that while likely to greatly reduce fraud at the point of sale, the big switcheroo could leave many consumers scratching their heads.

The reason, according to report author Julie Conroy, is that card issuers will replace the current, simple signature-verification process using mag-stripe credit cards and signature-based debit cards with so-called chip-and-PIN or chip-and-signature verification with EMV cards. Entering a PIN on a credit card transaction is practically unknown in the U.S., and the majority of debit transactions also use signature verification.

“I think we are going to see a lot of consumer confusion,” says Conroy, a research director at Boston-based Aite Group.

The downside for issuers is that cardholders might relegate what they perceive as troublesome cards to the back of their wallet. A large Canadian bank that hadn’t prepared its credit card holders enough experienced that problem when Canada converted to the EMV standard a few years ago. “It was a change in behavior,” Conroy says.

Hoping to avoid that confusion, seven of the 14 U.S. card issuers willing to state their  preferences to Aite said they planned on using chip-and-signature verification for their coming EMV cards. Three preferred chip-and-PIN, three others were undecided, and one plans to first use chip-and-signature but then migrate its cards to chip-and-PIN.

For the report, Aite interviewed a total of 15 issuers representing 56% of U.S. credit card holders; many of the executives queried also were familiar with EMV issues involving debit cards, Conroy says.

Eleven of the 15 issuers expect to have the majority of their portfolios converted to EMV by October 2015. That’s when the major card networks will shift liability for fraudulent transactions to merchant acquirers—and ultimately merchants—if the cardholder presents an EMV contact chip card at the point of sale but the merchant’s terminal can’t process it.

Four issuers plan to begin pumping out EMV cards late this year, followed by five more in 2014. The U.S. is the last major country still using magnetic-stripe cards, and a number of American financial institutions already provide EMV cards to international travelers.

In a separate set of interviews with executives from 66 financial institutions attending a First Data Corp. conference in May, 58% of respondents said they were undecided about the types of chip cards they would issue. Some 9% of respondents said they planned to issue contact-only EMV cards while 33% said they would issue so-called dual-interface cards. Such cards are slightly more expensive than contact chip cards but support contactless transactions that facilitate fast payments in high-volume locations.

While the costs for EMV technology have decreased over the past several years, the move away from the magnetic stripe will still generate huge bills. EMV conversion will cost issuers about $6.8 billion, including mailing costs, based on an average expense of $4 per card for an estimated 1.7 billion network-branded credit and debit cards, according to Aite. On the merchant side, some 12 million point-of-sale terminals will need to be converted at an estimated cost of $250 to $300 apiece. And upgrading the 410,000 U.S. ATMs will cost $2,000 to $3,000 apiece, Aite says. The total bill could come to about $11 billion and doesn’t include certain software expenses, Conroy says.

EMV proponents say the payoff will be greatly reduced counterfeit fraud with chip-and-signature, while chip-and-PIN will thwart most counterfeit and lost-and-stolen card fraud.  In the United Kingdom, where EMV is now well established, counterfeit fraud fell 75% between 2008 and 2012, according data from Financial Fraud Action UK cited by Aite.

EMV, however, does little to prevent card-not-present fraud. Such fraud in 2012 accounted for 63% of all U.K. card fraud compared with 30% in 2005.

The upcoming U.S. conversion also contains the added complexity of meeting the transaction-routing requirements of the Durbin Amendment in 2010’s Dodd-Frank Act, one area where the simple magnetic stripe is superior to EMV.