What Can We Learn from the Rollout of EMV?

What Can We Learn from the Rollout of EMV?

What Can We Learn from the Rollout of EMV?

Steve Mott

Steve Mott

Steve Mott is a 25-year veteran of the electronic payments industry, specializing in transaction economics, innovative uses of debit networks, authentication and security technologies, and emerging alternative payments types and venues.

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The whoosh you might be hearing these days in the payments industry could be the air coming out of the EMV balloon. After a chaotic, acrimonious year — definitely a year of living dangerously for merchants — the collective sigh of frustration, resignation and even militant indignation is palpable.

So what happened?

Certainly, in the years leading up to pulling the EMV trigger, any objective entity would have realized that the U.S. payments marketplace was far larger and more complex than any EMV-adopting country up to that time. Giving this nation one year less to make what remains a controversial conversion was misguided at best. One year after the widely decried imposition of the October 2015 liability shift, the rest of the payment ecosystem is finding motivation to resist the will and ambitions of those who pushed for EMV.

Planning struggles

Two years ago, a would-be replica of the payments ecosystem called the Payments Security Taskforce (handpicked by Visa and Mastercard) convened to weigh in on card security so regulators, chafing from the huge merchant data breaches in late 2013 and early 2014, would simmer down. The group — which eventually called for a combination of encryption, tokenization and chip (albeit to be deployed at mostly the merchants' responsibility) — heard from its token merchant representatives that the brands' certification processes were so complex, so expensive, so little-supported and bereft of any cross-certification efficiencies that the October 2015 liability shift would be a disaster.

A much more representative payment ecosystem, started by the Smart Card Alliance and called the EMV Migration Forum (EMF), convened in 2012 to facilitate the conversion to EMV, and by 2014, concerns over lack of industry readiness reached a crescendo. Ultimately, more than 200 organizations — many of them counting on making money from a successful migration — realized how unworkable the liability date was and constructively pleaded with the industry heavyweights to delay it until all the various programming hurdles could be overcome.

This well-analyzed and thought-through appeal from the industry was ignored. By early 2016, the rest of the industry discovered why: EMV had been pitched as a revenue opportunity, with the ability to charge back virtually any transaction issuers wanted to. Meanwhile, merchants — which were at the final step of the end-to-end EMV processing (and therefore had to wait for everyone else 'upstream' to get ready first) — would be in no position to combat the bogus chargebacks.

Deployment struggles

Two years later, in the midst of deployment, there were struggles. This included long lead times to get certified, lack of suppliers to provide it, hundreds of millions of dollars in fake chargebacks, issuer chargeback systems that broke down due to poor specifications from the brands, consumer confusion over wording of debit choices on terminal screens, slow processing times, terminals that didn't work, the inability to access U.S. Common Debit options, and the list goes on.

On top of that, recurring and endemic problems in accepting PIN debit transactions — a staple of EMV 'chip-plus-PIN' deployments in other countries — and brand rules that further discouraged use of PIN prompted three of the biggest retailers (Walmart, Kroger and Home Depot) to file lawsuits against the brands and big issuers.

Contrary to the networks' hyped-up forecasts for chip adoption, half of all EMV-issued cards are still in bank vaults, as issuers tiptoe along this fractious roll-out pathway. Many issuers are sitting on their hands due to the legal and regulatory challenges already coming — for instance, EMV's complicated Durbin routing and PIN-debit use, as well as continuing doubts about eventual acceptance of contactless.

Merchants drag their heels

Meanwhile, many merchants are convinced EMV is a bad deal for them and are agonizing over when they might have to commit to it. Some are simply considering 'self-insuring' on fraud or asking for additional IDs for suspicious cards (especially internationally-issued cards) — which incurs significant pushback from the networks who fear that these checks might discourage acceptance.

But what's the upside for a smaller merchant? The National Association of Convenience Stores (NACS) did a survey a couple of years ago that found that the average single-unit gas station/convenience store experiences $700 a year in card chargebacks. Compliance with PCI can cost $2,000 a year. Three EMV terminals, programming and certification in-store can cost another $2,000.

With most of the air out of the EMV balloon a year after the ill-timed liability shift, the industry can clearly see the downfalls of such expensive (and, according to many, outdated) security. The industry would be better off investing in end-to-end encryption, maybe tokenization and digital/mobile payment alternatives — some of which merchants are embracing so that they can get the real security they need.

The statements and opinions of the writer do not necessarily reflect those of TSYS.

Other Articles by Steve

Steve Mott

Steve Mott is a 25-year veteran of the electronic payments industry, specializing in transaction economics, innovative uses of debit networks, authentication and security technologies, and emerging alternative payments types and venues such as stored value, online and mobile commerce and transacting over social networks.

As principal of BetterBuyDesign, a payments consultancy, Steve conducts strategy, product, technology and market assessments for banks, processors, networks, technology providers and merchants, and advises a number of investment firms on industry trends and developments. You can reach him at stevemottusa@gmail.com.

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