Network Divide Over EMV Comes to the Fore as Rumors About a Liability-Shift Delay Surface

By Jim Daly

The deep divide within debit networks about bringing Europay-MasterCard-Visa (EMV) chip cards to the United States was on full display Monday at a conference in which a Visa Inc. executive hinted that Visa might be open to a delay in a major EMV deadline. But an executive from MasterCard Inc., noting that EMV is already helping to cut ATM fraud, countered that any delay will just mean more counterfeit fraud in the U.S.

The comments came during a panel session at SourceMedia Inc.’s ATM, Debit & Prepaid Forum in Las Vegas that also featured executives from several electronic funds transfer networks. The EFT networks by and large oppose EMV because of the expense and operational difficulties of replacing magnetic-stripe cards with chip cards. Their executives in particular noted the hurdles in making EMV chip cards compliant with the Dodd-Frank Act’s Durbin Amendment, which requires merchants to have transaction routing choices among at least two unaffiliated networks so that their interchange expenses in theory can be lowered.

Debit industry insiders at first regarded the task of adapting EMV cards to the Federal Reserve Board’s regulations implementing Durbin’s routing requirements as difficult enough. Unlike mag-stripe cards, each EMV application is proprietary to a card brand, so while multiple payment methods may be available on the app, it supports only one network.

Now, EFT executives say, the conversion could become even harder because a federal judge in late July ruled that the Fed did not follow Congress’s intent in implementing the Durbin Amendment’s interchange price cap or its transaction-routing requirements. The Fed is appealing, but if the ruling by U.S. District Judge Richard J. Leon in Washington, D.C. stands, there is a distinct possibility that with each debit card transaction, the merchant must have a choice of two unaffiliated PIN-debit networks and two unaffiliated signature networks.

Leon’s ruling “exponentially complicated the problem,” said panelist Jim Hanisch, executive vice president of the Co-Op Network, an EFT networking serving credit unions.

Another panelist, David Schneider, president of Discover Financial Services’s Pulse EFT network and an outspoken EMV critic, said EMV “was not designed with merchant routing as part of its core DNA.” He also took to the occasion to say that rumors are floating around the debit industry that EMV deadlines might be delayed.

It was Visa, the nation’s largest payment card network, that got the EMV ball rolling in the summer of 2011 when it announced plans to migrate the U.S. to the more secure chip cards with a package of incentives and deadlines—a package largely adopted by the other major general-purpose networks. A key deadline is looming in October 2015, when liability for counterfeit fraud will shift to U.S. merchants if they cannot process EMV card transactions. (The liability shift does not kick in for automated fuel dispensers until two years later.)

Since Visa essentially set the EMV agenda, the anti-EMV comments from Schneider, Hanisch and Neil Marcous, president of the NYCE EFT network, more or less forced Visa’s representative on the panel, Bob Whyte, head of consumer debit products for North America, to respond. Whyte did not promise any deadline delay, but he acknowledged the difficulties card issuers, merchants and processors face, especially with the uncertainties Leon’s decision created.

“I think it is appropriate to understand the implications of that, and that’s what we’re doing now,” Whyte said. “Having said that, we’re very mindful of the fact that these liability shift dates are still out there and they’re rapidly approaching a few years from now, so we’re very mindful of the stress this is creating for everyone in the room. It’s one of the highest, if not the highest, priority within Visa to understand this relative to the uncertainty that faces us and to come out with direction and [a] point of view on this as quickly as possible.”

MasterCard has been involved with EMV for about 20 years in Europe and it strongly supports the U.S. conversion. Leland S. Englebardt II, group head of Global Network Products at MasterCard, noted that network sentiment for or against EMV seems to be based on whether a network operates just in the U.S. or globally. He said EMV is now established in most of the world and by forgoing the chip card standard, “you have to regard the United States as an island isolated from the rest of the payments world.”

In April, MasterCard imposed a liability shift for fraudulent cross-border ATM transactions in the U.S. While that deadline generated controversy, Englebardt said 10% of U.S. ATMs are now EMV-compliant, and cross-border fraud is coming down.

“In MasterCard’s view, [EMV] is not an investment that can or should be deferred,” he said.