Spurred by Fraud and Fear, Debit Card Issuers Cast Aside Their EMV Reservations

Nothing like a good data breach to serve as a kick in the pants. Thanks in part to Target Corp.’s breach that compromised 40 million payment cards, debit card issuers are committing themselves to the Europay-MasterCard-Visa (EMV) chip card standard to a much greater extent than they did a year or two ago, according to the Pulse electronic funds transfer network’s newly released 2014 Debit Issuer Study.

Research and consulting firm Oliver Wyman conducted the ninth annual study for Houston-based Pulse, a unit of Discover Financial Services, by surveying 71 financial institutions of all sizes. These banks and credit unions have issued 142 million debit cards that account for 45% of total U.S. debit transactions, and they operate 76,000 ATMs.

The survey covered 2013. All respondents were affected by the Target breach, which came to light in December, study co-lead Tony Hayes, a Boston-based partner at Oliver Wyman, tells Digital Transactions News. “What we heard across the board, about 10% of issuers’ cards may have been compromised just in the Target breach alone,” he says.

Add in other breaches, and 14% of all debit cards were compromised last year, nearly three times the 5% compromised in 2012. Although 2013’s overall fraud rate for PIN-debit cards stayed at 0.7 basis points (0.007% of gross volume), the rate on signature-debit cards increased to 5.7 basis points from 5.4 in 2012. Total losses include those on domestic card-not-present sales, 8 basis points; domestic card-present sales, 2 basis points, and international transactions, much riskier at 51 basis points.

Hayes says fraud after Target’s breach occurred on only a small, still undetermined percentage of comprised cards. Still, issuers didn’t like what they saw. “Clearly, from an issuer point of view, the trend is going in the wrong direction,” he says.

The payment card networks are touting EMV as a way for the U.S. to get in step with the rest of the world, which has embraced the chip card standard, and to reduce point-of-sale counterfeiting. In 2013, even though the networks had earlier announced an October 2015 liability-shift deadline to spur chip card adoption, issuers were mostly giving EMV the cold shoulder, says Hayes. They were still hoping the networks would extend the 2015 deadline and worried about how to solve the technical issues of routing transactions to multiple networks as required by the Dodd-Frank Act’s Durbin Amendment. Many also thought that the Federal Reserve’s rule implementing Durbin would be overturned, as it was for a time when a federal district judge declared it didn’t meet Congress’s intent.

All the more reason to delay an expensive rollout of chip cards. But those issues have been resolved in recent months, including the networks quashing any talk of delays. “That was a year ago, by and large people said ‘Let’s wait,’” says Hayes. “Now, twelve months later, the whole industry has done a one-eighty.”

Issuers aren’t in love with EMV by any means. The counterfeit fraud against which EMV is most effective accounts for less than half of all card fraud. “There still is a very weak business case to implement EMV from an issuer point of view … but issuers have concluded we need to do this,” says Hayes.

Some 67% of debit issuers now plan to offer EMV cards in 2015. Seven percent already issue them and 12% plan to this year, leaving only 14% saying they have no EMV plans. In 2012, half of issuers had no EMV plans.

The reasons for the change include preventing point-of-sale fraud that otherwise would occur on magnetic-stripe cards, and public relations: appearing to be a technological leader with a successful EMV rollout while avoiding a disastrous data breach on mag-stripe cards. “You hate to be the bank that’s on the front page of the newspaper,” Hayes says.

Other survey highlights:

• Debit cards continue to grow in popularity for spending, with the average active card (at least one transaction in the preceding 30 days) generating 20.1 transactions per month in 2013, up from 19.4 in 2012. Average annual spend per active card grew 1.4% to $8,875. But monthly ATM cash withdrawals decreased to 2.3 per active card last year from 2.5 in 2012, and are down 6% since 2007.

• The study estimates average gross annual interchange revenue for issuers subject to the Durbin Amendment’s interchange cap, those with $10 billion or more in assets, at $56 per active card in 2013 compared with $105 for exempt issuers. Regulated issuers’ revenues held steady at 23 and 24 cents per signature and PIN transaction, respectively. But smaller issuers’ average interchange on signature transactions fell a penny in 2013 to 47 cents, and to 29 cents on PIN transactions from 31 cents in 2012.

• Some 47% of debit issuers offered rewards programs to cardholders in 2013, up from 32% in 2012. That finding indicates that larger issuers are finding ways to compensate for the approximately 50% cut in their interchange revenues after the Durbin cap took effect in late 2011. For example, use of points programs, usually issuer-funded, is down, but merchant-funded offers are up.