Acquiring: The Chip Card’s Acceptance Quandary

Having established itself overseas, EMV appears to be coming to the States, with some issuers already pumping out chip cards. Despite high-profile enthusiasts like Wal-Mart and Home Depot, however, few merchants are on board.

By Karen Epper Hoffman

While the Europay-MasterCard-Visa (EMV) chip card standard has garnered plenty of headlines recently, most merchants arenÕt so sure theyÕre ready to make the move to chip card acceptance.

EMV is now in widespread use outside the United States and replaces the magnetic stripe with a much more secure device. But for U.S. merchants the major obstacles include investments in existing systems, established practices in the stores, and a lack of momentum and perceived benefit.

In fact, the merchant and acquiring communities are biding their time as they wait out a better business case to justify the enormous cost of making their point-of-sale systems EMV-capable.

ÒMy perception is that weÕre at the very early stages here [with] the introduction of chip and PIN cards, especially on the merchant and device side,Ó says Bill Farris, vice president of product for processor Chase Paymentech. ÒThe U.S. marketplace is pretty close to ground zero.Ó

There have been a couple of notable wins in recent months, according to chip card proponents. Home Depot Inc. and Wal-Mart Stores Inc. have both announced plans to become EMV-compliant. However, industry observers point out that, while these Goliaths of the merchant world represent a move forward, the lack of other retailers following close on their heels with EMV acceptance plans of their own signifies a wait-and-see strategy in the industry as a whole.

ÒAside from those two large merchants, no one in the U.S. is supporting EMV right now,Ó says Philippe Benitez, vice president of marketing and business development for secure transactions at Gemalto North America, a prominent chip card maker. ÒItÕs so early in the process that itÕs hard to say how long it will take … And all countries have run into the same chicken-and-egg problem.Ó

Indeed, as Benitez says, the issue of merchants not wanting to pay to upgrade their terminals and point-of-sale systems until thereÕs a ready and sizable market of chip card holders is a critical one. A couple of small U.S. financial institutions have begun issuing chip cards to their customer bases, but hardly enough to make even a small dent in the huge mag-stripe card-carrying populace of this country yet.

For large merchants especially, the move to EMV support can be costly since itÕs more difficult to convert a complex integrated POS system than to swap out a rented standalone terminal. Either way, current economic woes are keeping most merchants in a holding pattern until they see more of a benefit to offset the cost of transitioning their terminals and middleware.

ÒMerchants are scratching their heads about what they see as valuable to them,Ó says Mimi Hart, chief executive of MagTek Inc., a developer of secure components for mag-stripe and EMV-compliant card readers. She echoes the sentiment that itÕs the same chicken-and-egg dilemma as plagued earlier U.S. smart card trials in New York City and Atlanta in the 1990s and early 2000s. ÒBut itÕs also exacerbated by the economy,Ó she adds.

ÔSeveral FlavorsÕ

Randy Vanderhoof, executive director of the Smart Card Alliance, a Princeton Junction, N.J.-based trade group, agrees that merchants have been holding out for the issuers, as well as more of their peers, to move. ÒWhat weÕre hearing from merchants is that theyÕre stuck,Ó he says.

As discussion of contact and contactless EMV swirls, and processors and terminal manufacturers introduce POS technology with end-to-end tokenization and encryption, thereÕs general confusion about where the market is headed and how quickly. ÒItÕs led to inaction,Ó Vanderhoof adds. ÒPeople donÕt want to make a mistake and invest in the wrong technology.Ó

Hart believes that even the so-called early wins in EMVÕs U.S. progress may not be as winning as proponents would hope. Wal-Mart, for example, Òbit the bulletÓ six months ago and added chip card contacts to its POS readers, but they still lack the necessary firmware to accept EMV-compliant transactions, Hart says. Home Depot has not publicly announced how many of its terminals are currently chip-capable.

Both retailers declined to comment for this story.

Further, while EMV provides a standard for secure chip transactions, Hart says there are Òseveral different flavorsÓ of EMVÐmeaning that merchants and their acquirers need to get their firmware certified separately by all the major card brands that they accept on those terminals, adding to the cost of embracing EMV.

For those industry observers pushing for chip card progress in the States, Canada represents both a beacon of hope and a bastion of differences. Canada has been rolling out EMV for five years, and boasts promising statistics since cards and terminals started moving to the chip in 2007.

As of December 2010, 70% of cards issued in Canada, 55% of point-of-sale terminals, and 90% of ATMs deployed by financial institutions were EMV-compliant, according to Advanced Card Technologies (ACT) Canada, an association promoting new card technologies (ÒCanada Puts Down Chip Card Roots,Ó June 2011).

U.S. merchant acquirers can look to Canada for some direction in terms of how EMV might play out here, according to Farris. For example, he says that many of the first merchants to enable chip and PIN were smaller merchantsÑsince they lacked the fully integrated point-of-sale systems of the larger retailers, they had an easier, faster transition.

ÒThose POS terminals are less complicated than the integrated projects, where thereÕs more development,Ó Farris says, adding that in Canada, most small-to-mid-market merchants rent their terminals, further facilitating the ease of upgrading.

Vanderhoof says Canada should illustrate the importance of cooperation and communication. ÒWhat the Canadian experience reinforced was that itÕs really necessary for merchants and processors to talk regularly and work out challenges and get to market,Ó he says.

ÔIn a StuporÕ

Unfortunately, comparisons to Canada are fraught with risk. Observers point out that the Canadian bank and merchant-acquiring markets are significantly different from the States. Indeed, perhaps the most critical key to the relative success of CanadaÕs EMV rollout was Òthe ability of the countryÕs banks and transaction processors to work together to create and operate Interac, CanadaÕs national PIN-debit network,Ó as Digital Transactions pointed out in its June story. The U.S. industry lacks that parallel to Interac.

Also, as Hart points out, the U.S. has much larger and more disparate banking and merchant industries and already relatively low fraud (compared with what was being experienced in many countries prior to their move to the more secure chip technology).

Indeed, many of the same issues that drove Canada, the United Kingdom, and other countries onto the EMV bandwagon are not as much of an issue for the United States, thereby lessening U.S. merchantsÕ willingness to make the leap. For example, as Benitez says, while European supporters of EMV needed it to reduce their communication costs, U.S. merchants have been online for decades.

ÒThe two ecospheres are so different,Ó Hart says, ÒitÕs hard to make comparisons between the two.Ó

While the market is moving slowly, it is moving, somewhat, toward EMV acceptance. Among notable developments, a number of merchant acquirers have launched their own chip card-capable product lines. Case in point: After its highly publicized security breach, which was disclosed early in 2009, Heartland Payment Systems began supporting end-to-end data encryption with its proprietary E3 terminals, which also support EMV cards.

Farris says that merchant acquirers like Chase Paymentech are focusing on educational issues as much as technological ones by creating programs to train and educate merchants. The hope is to sway merchants that are questioning whatÕs in EMV for them.

Many acquirers are leveraging the knowledge they gained in doing EMV rollouts in other parts of the world. ÒWeÕre playing the role of putting supportive and educational materials in the hands of merchants, helping them with the learning curve,Ó Farris says.

For its part, Visa Inc. is also trying to speed the plow with its announcements that it will waive the need for merchants that support both contact and contactless EMV to annually validate PCI compliance as of October and, in turn, will shift fraud liability to the merchant acquirers that do not fully support chip. Processors have to be certified for EMV by April 2013.

The Visa announcement not only gives EMV in the United States a high-profile boost, but it also clarifies a timeline around which merchants and acquirers can make plans, Vanderhoof says. For merchants, this announcement starts the Òclock ticking,Ó he says.

The recent announcement that the shift in liability will start as of April 2015 presents an ambitious goalÑperhaps too ambitious for an industry that is still trying to justify the importance of chip. ÒVisa drew a line in the sand,Ó Hart says, Òand now you have acquirers scrambling, but weÕre still not getting a push from the merchants.Ó

Vanderhoof says: ÒThe deadlines are realistic and aggressive. It remains to be seen how fast merchants and processors can respond.Ó He also admits that the industry is still awaiting a response from MasterCard, American Express, and Discover on their planned EMV timelines. ÒWe have to bring issuers in line to agree on a common timeline in order to be able to build out the acceptance infrastructure,Ó Vanderhoof adds.

Benitez echoes: ÒWith the liability shift, everyone is in a stupor … TheyÕre faced with an insurmountable task. TheyÕre still in education mode.Ó

Getting into Mobile

Issuers are gradually beginning to get EMV-compliant cards out into consumersÕ handsÑa move that could diminish the chicken-and-the-egg problem that has stymied chip cards in part. United Nations Federal Credit Union and Fremont Bank have both begun issuing chip cards to their customer bases, since both have many customers that travel outside the States to countries where chip cards are well-established.

Last year, State Employees Credit Union in North Carolina committed to replace its entire debit card base with EMV cards.

And several major banksÑincluding JPMorgan Chase & Co., Bank of America Corp., and U.S. BancorpÑare allowing credit cardholders to apply for EMV-compliant chip cards, especially if they travel abroad frequently. Chase, for example, offers a chip-based card for three separate card programs favored by overseas travelers, but requires consumers to sign rather than enter a PIN.

Ò[Issuers] are bringing that knowledge and expertise into issuing cards … so they have that in place when they start issuing chip cards to their broader portfolio of customers,Ó Vanderhoof says.

Meanwhile, industry buzz is already turning toward the implementation of EMV for mobile payments, which some believe will help boost support of EMV compliance. ÒThereÕs already an installed base of contactless readers and … as they evolve to support EMV, that will stimulate the deployment of EMV terminals,Ó Benitez says.

Vanderhoof also sees the drive to mobile payments as Òstirring the pot and accelerating thinking around EMV for issuers and merchants.Ó Since mobile innovations seem to move at a much faster pace, Vanderhoof believes that the desire to incorporate EMV compliance into secure mobile payments will speed the process of chip card acceptance, particularly on the contactless side.

MagTek\'s Hart says the industry may lead with contactless EMV: ÒEMV for contactless strategies makes more sense because it gets merchants into mobile,Ó she says. ÒYouÕre going to see more people using their phone as a replacement for the card.