EMV Dilemma for Card Networks

EMV Chip and Pin USA Benefits and Risks

Is U.S. prepared for the EMV chargeback avalanche?

Will merchants stop accepting credit cards?

These two are the main dilemma associated with the EMV or “Europay, MasterCard, and Visa” Cards. For their answers, let us peek into its background.

EMV Background

The cost of annual frauds related to debit / credit cards is billions of dollars over the entire globe. To curb this cost, a scheme was hatched many years ago wherein EMV cards were to introduce to the U.S. The most beautiful part of this scheme was “the liability shift”, which allowed the EMV cards to be sold as voluntary, user-friendly and highly secure. The participants of payment industry would have the flexibility of deciding themselves on whether or not the economics holds water to the high price of the conversion. For the end users, there would be drastic cutback in the chances of fraud. As far as the Card Brands were concerned, the EMV Cards will cost very little or nothing.

The fateful PIN decision

Majority of banks and issuers considered that a premature move to the EMV Cards based on chip-and-PIN format could result the consumers in pushing their card to “back-of-wallet.” Unlike the rest of world, Americans prefer to shun the PIN-based credit transactions. In general, an average consumer has an average of 4 credit cards, where no PIN is required. Hence, the shift of EMV Cards of chip-and-PIN type was considered as extremely risky in terms of the transaction volumes.

Therefore, there was always a dilemma associated with the implementation of EMV in the United States of America. To overcome this, it was decided that U.S. credit cards would have an EMV Chip along with a magnetic stripe for “fallback.”

The chargeback avalanche

The POS liability shift was seen six months ago and now in 2016, merchants are feeling arduous because of it. The Merchant Advisory Group states that for smaller merchants, the chargebacks have piled up to $10,000 weekly and for larger ones, the rate is up to $1 million weekly. The fact is, they were not serious regarding the “optional” upgrade to EMV for which a four-year window was provided. So now, they are jostling to install the necessary hardware for eliminating the torrent of chargebacks. They are also complaining about the 4 years window being too small for the EMV implementation.

Adding onto the fusillade of chargeback losses, they are multiplied as the issuers have selected to retain the magnetic stripe, which expedites the card frauds.

The next chargeback landslide

The liability shifts are imminent for ATMs (Mastercard in October 2016, Visa in October 2017) as well as for the gas pumps (October 2017 for both brands). This clearly implies that their owners are the next to face the chargeback landslide. In addition, with the new EMV technology, the upgrade path may require aging gas pumps and ATMs to do a comprehensive replacement in the coming months.

Brand Damage

The card brands have blindfolded themselves by the financial windfall of shedding billions in fraud losses to their own clients. Therefore, these brands are now standing against a number of risks such as:

Regulatory Risk: Many people including senators and others in Washington are investigating EMVCo, inquiring about the factors like its ownership and impact in the payment sector. The question is can the liability shift cause an expanded financial regulation – and at what cost to the card brands?

Legal Risk: Already, lawsuits have been filed which caution class action. This raises the question – “what will be approximate cost of the legal & public relations o the card brands?”

A Return to Cash: There is possibility that the merchants affected with the chargeback avalanche may just decline accepting the credit cards. If a retail ATM is installed and nonexistent or minimal surcharge is implemented then clients can get convenient access to cash.

U.S. has preferred to convert to EMV without a regulatory mandate, which is entirely contrasting to the rest of the world. There is a good chance that instead of safeguarding themselves against the heavy losses of frauds, they might find themselves between a rock and a hard place.

Author of this post are Bill Trueman and Kevin Smith, who are Europe’s leading payments, risk and fraud experts and frequent commentators and writers on the issues involved. They have vast experience of the banking, insurance, retailer and international payment schemes, and are recognised thought leaders at the forefront of many industry-wide and international debates. For more information about EMV CHIP & PIN Security, Risk Review Strategy and Parameters, visit here.

News Source: MobilePaymentsToday

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