Payment cards in the United States are finally starting to get much smarter. After much debate, some resistance, concerns and a number of retail breaches, smart cards, also commonly known as chip cards, are gradually replacing the magnetic stripe cards that have been in circulation for decades in the U.S. market. Unlike the magnetic stripe, these payment cards come equipped with an embedded integrated circuit (where the data resides), which is “dipped” into a reader, rather than swiped like a magnetic stripe card. The cards have already been in use around the globe – particularly in the most advanced commercial countries in Europe, Asia and South America – for as long as a dozen years now. In fact, the technology behind these chip cards is typically referred to as EMV for Europay-MasterCard-Visa, the card brands initially behind the chip card technology standards and specifications.
“We are way behind the rest of the world,” says Deborah Baxley, principal for Capgemini Financial Services. “We need to set a date.'”
Indeed, in the United States, which boasts the world's largest credit card and debit card base in the world, financial institutions that issue payment cards and the merchants that accept them have virtually crept toward chip-based cards and terminals. Chip card implementations only began domestically in the past three to four years, when the major card brands came out with their plans to support a chip card infrastructure for the United States. Merchant acquiring banks were mandated to start supporting new EMV data standards in April 2013. In upwards of four years, U.S. card issuers have been replacing credit and debit cards as they are lost or expire, typically with hybrid cards that have both a magnetic stripe and a chip.
And perhaps, most notably, merchants have an eye toward October 2015, when new rules will shift the liability for most fraud losses in a face-to-face environment (not phone or online commerce) from the issuer of the consumer's card to the merchant. Specifically, if fraud results from the compromise of a mag-stripe card transaction, the merchant will be held liable if it is not equipped to accept EMV-compliant chip-card transactions.
By the end of 2014, the Smart Card Alliance – a nonprofit that aims to “stimulate the understanding, adoption, use and widespread application of smart card technology” – and its related EMV Migration Forum, estimated that the United States had approximately 120 million EMV-compliant cards, out of a total of 1.2 billion debit and credit cards in circulation total, and 4.5 million EMV-enabled payment terminals installed out of a total of 12 million POS terminals in place at merchants, according to Randy Vanderhoof, director of the EMV Migration Forum and also executive director of the Smart Card Alliance.
The final push toward the 2015 liability shift is now underway for retailers, supermarkets and drug and convenience stores. The goal is certification of EMV functionality in the second quarter, providing a path for store rollouts in the third quarter, according to Patricia Walters, senior vice president for corporate EMV strategy at Vantiv, a Cincinnati-based payment processing and technology provider. “Large numbers of issuing banks and credit unions are putting cards in the market,” says Walters, “largely utilizing their natural reissue cycle to offer their customers the new and more secure functionality.”
But, for as far as the industry players have come, Capgemini's Baxley believes that less than half of merchants will be ready to process EMV chip-based transactions by October 2015, when the liability for in-person payment fraud shifts to merchants. She estimates about seven in 10 U.S. payment cards will have a chip. And, more to the point, even if the card has a chip and the point-of-sale terminal accepts chip cards, there is no guarantee that the payment will not be run as an old-fashioned non-EMV-compliant magnetic stripe swipe transaction, since the frontline staff who are taking payments may or may not be aware and trained in the new technology and method of transaction.
“It's not like a switch is going to flip on come October,” Baxley points out.