The Gimlet Eye: How To Make Real Payments Progress

As you’ve no doubt noticed, the huge data breach at Target Corp. has triggered an equally impressive avalanche of commentary about whether the baneful effects of such crimes might have been mitigated had Target, and the rest of the country, converted to EMV by now. The presumption here is that, while EMV won’t stop a breach, it will render card data useless to cyber thieves.

The corollary argument is that the conversion to EMV (the Europay-MasterCard-Visa chip card standard used in most advanced economies with the glaring exception of the U.S.) is lumbering along at far too slow a pace, leaving merchants, banks, and cardholders vulnerable to more breaches. Visa Inc. and the other major networks have set an October 2015 deadline for switching counterfeit-card liability to the party that isn’t prepared to process EMV transactions. The presumption is that that will be tens of thousands of merchants, many of which argue they can’t gear up that fast.

We take no position on the finer points of the security debate swirling around EMV, though we are prepared to stipulate that chip cards are safer than mag-stripe plastic. But we do observe that there is one remedy, strangely absent from the debate, that could move things along much more rapidly: interchange incentives.

Here’s how it works. Merchants that meet certain conditions, including having installed gear and software to accept EMV transactions, will see a material reduction of interchange cost on those transactions from what they pay for mag-stripe payments. Enough of a reduction to matter, for a long enough period to get everyone on board. Applying to both credit and debit transactions.

Visa, MasterCard Inc., and their client banks will no doubt howl, but such an incentive has been used before to stimulate important changes in the payments system. Back in the ‘80s, for example, the networks used interchange incentives to convert paper-loving merchants to draft-capture technology. More recently, the networks used them to grease the skids for their 3-D Secure online security technology. That Verified by Visa and SecureCode may not be setting the world on fire is owing to other causes we will have to treat elsewhere.

The point is, interchange incentives, sincerely offered at rates yielding real savings, work. Indeed, we argued in this space some years ago that the networks would be better off pushing contactless technology with interchange breaks. They didn’t, and contactless acceptance has stagnated.

Unfortunately, merchants have somewhat poisoned the atmosphere for such incentives with their militancy for interchange regulation. But, while that can’t be undone, perhaps the Target and other breaches will finally shine a light on this long underused tool for progress.

John Stewart, Editor

john@digitaltransactions.net