EMV in the US: 'Swipe' Out, 'Dip' In
Losses originating purely from the use of magnetic or 'swipe' cards are pegged at $8.6 billion per year and many experts believe this figure could touch $10 billion or higher this year. Given this background, businesses shouldn't need much convincing to move to a more secure alternative. However, considering the figures above are that of US and it is the last major economy to move to EMV, that is, chip cards that need to be 'dipped' into a machine for transaction, it seems to have taken a lot more convincing than one would have deemed necessary. Better late than never, the US officially adopted EMV on Oct 1, 2015. It is a welcome decision as the US is home to about a quarter of all of the world's credit card transactions.
What took the US so long? If we look back, there have been two main causes that led markets towards EMV - the first being the objective to combat increasing card fraud, and the second, the lack of a robust telephony network. The latter presented the need for a system that could operate offline, such that the card and the terminal are able to allow settlements, without the constraints of the bank's system.
In the yesteryears, America was immune to both those factors. Fraud was more prominent in other markets and connectivity was better in the US than in most other places. However, over time, as other markets began to plug the holes in their defenses, fraudsters shifted their attention to the path that did not only offer the least resistance, but was also very lucrative - the US market. Thus, the US went from being impregnable, to most vulnerable.
Now that it is here, one aspect that is being largely discussed is the 'liability shift.' This essentially means that in case of a fraud, the party with the lesser technology would have to bear the brunt of the liability. From the 'carrot and stick' analogy, the liability is the 'stick', being used to encourage parties to adopt new technology and bring more harmony into the market through better coordination. This has made both the issuers and the merchants invest in the migration, simultaneously. If one migrates and the other doesn't, it would just lead to fraudulent activities shifting within the ecosystem, thus making the entire exercise inefficacious.
The associated costs and consumer adoption are two of the biggest impediments in the transition to EMV. The terminals that read chip cards can cost up to $1000 apiece, which may force smaller players to decide against adoption. However, issuers, such as American Express, have pledged financial aid to help smaller businesses defray the costs. Meanwhile, Square, a Silicon Valley startup, has announced that it is working on developing more affordable chip readers. Sooner these effort bear fruit that reaches the smaller businesses, the better it would be for the cause of secure transactions.
Additionally, there is the problem of customer behavior. However, they can be encouraged to move to new cards through demonstrations and offering certain benefits.
Yet another, but much bigger elephant in the US stores is Apple Pay that requires around 220,000 retail stores to add NFC capable terminals. For these merchants - having already adopted the Apple Pay terminal - the adoption of EMV terminal would be counterintuitive.
In spite of these challenges, EMV has started making headways in the US. But that doesn't mean it is the end - in fact, it is the beginning of a new struggle as fraudsters are likely to move to ecommerce and omnichannel merchants. Merchants' solutions to ward off these challenges and fraudsters fighting to disrupt such efforts should make this battle worth watching.