EMV Implementation: The Task Ahead

Navigator Edition: July 2012
By: David Abraham and Stephen Dye

Recent announcements from Visa, MasterCard, American Express, and Discover have set the stage for U.S. implementation of EMV/Chip cards.  At the center of the coming migration is a card-present fraud liability shift from issuers to merchants and acquirers. But with the legacy popularity of magnetic stripe cards among issuers and swipe-only terminals among merchants, neither party is well prepared for the announced network deadlines.  In order to comply, stakeholders will not only need to upgrade physical infrastructure but also collaborate with one another to ensure a smooth transition that does not disrupt the cardholder experience.

Impetus for Implementation
EMV has become the de facto global standard. U.S. issuers, however, have remained loyal to magnetic stripe technology because of the low cost of online authentication and fraud scoring – a dynamic not present in Europe and other countries in the early days of electronic payments.  While the U.S. has historically experienced a low rate of card-based fraud relative to other markets, fraud may migrate to the U.S. as other regions implement the more secure EMV standards.  In light of increased card compromises and transaction fraud in key merchant segments, the networks have decided to accelerate U.S. adoption of EMV.

Structured organization and coordination of industry stakeholders, including small-scale test trials for EMV, have been the keys to successful roll-outs in multiple countries.  To this end, MasterCard announced its intent to create an industry-wide working group to coordinate migration efforts in the U.S., although its final structure and mandate remain to be seen.

Implementation Decisions

The question facing U.S. issuers is not whether to offer an EMV product, but rather what product(s) to offer and when.  Second-order questions about which card portfolios should be converted first, which customers have the greatest need for EMV, and what functionality and authentication the physical card should offer are similarly complex.

Product Segmentation: Issuers will need to determine, as they begin looking at EMV, what products to offer and which customers should be served first.  Essential to this decision is determining if customers in certain segments have a greater need for an EMV product than others.  Further, issuers need to decide which product lines need the functionality most urgently.

Credit cards are the most likely candidates for initial focus, given higher fraud rates and greater use outside the country. Most EMV products available today are credit card products issued to select customers.  Most early movers, including Chase, Citi, Wells Fargo, and Andrews FCU, are offering EMV credit cards to frequent international travelers who need EMV cards to make purchases overseas.  These limited roll-outs not only address a short-term customer need, but also provide a test ground for the new technology, allowing issuers to resolve problems prior to issuing, en masse.

Product profitability will also be a critical decision point for issuers as they consider absorbing the increased cost of issuing Chip cards or passing it along to consumers.  To date, early movers are issuing premium credit cards with significant annual fees that may offset EMV issuing costs; but as chip cards become mainstream, issuers may reconsider this approach.

Functionality:  In rolling out EMV, FIs have the option of introducing contact, contactless, or dual cards to customers.  This decision is complicated for issuers because functionality is dependent on merchant acceptance technology at the point-of-sale.  Contactless, for example, is popular with quick service restaurants, convenience stores, and transit authorities because of the high transaction velocity.  It is unclear, however, if other merchant categories will adopt physical chip readers or contactless pads going forward.  While issuers want to provide the most convenient and flexible option for customers, they may hesitate to offer dual function plastics (contact and contactless) that can cost approximately $2.00 to  $2.50, as compared to about $1 for a single function card.  To date, early movers like Chase have opted to issue contact cards for their clients.

Authentication Method:  EMV-compliant cards can be authorized with a PIN (Chip/PIN) or with a signature (Chip/signature).   On one hand, preserving signature verification avoids the customer learning curve that will be necessary if PIN becomes the universal standard in the U.S.  Conversely, PIN transactions are generally perceived to be more secure, particularly among merchants, and PIN enablement allows enhanced global operability for cardholders, one of the stated goals of EMV conversion by the networks.

Thus far, U.S. issuers are split in their approach for requiring PIN or signature verification on EMV transactions.   Chase has embraced signature verification, while United Nations FCU and Andrews FCU have rolled out PIN.  US Bank and Wells Fargo are currently experimenting with both authentication methods.  Visa is supporting signature authentication because it believes that with a 100% online environment, a PIN does not necessarily enhance payment security.  MasterCard is pushing in the opposite direction and advocating PIN as the preferred verification method.

Next Steps
Network liability shift announcements are driving EMV migration in the U.S.  Compliance with the new standards will require issuers and merchants to make significant investments in new equipment and infrastructure.  In particular, financial institutions need to make important decisions around product segmentation, card functionality, and card authorization.  Deciding between the alternatives in each category will necessitate not only further research but also educated assumptions regarding how the market will evolve.  To achieve this complex switch, careful planning and organization will be needed to complete a smooth transition for individual stakeholders, their customers, and the industry as a whole.

Figure 1: EMV Implementation Timeline


Source: The Members Group, network announcements, and First Annapolis research.

For more information, please contact David Abraham, Consultant specializing in Deposit Access, david.abraham@firstannapolis.com; or Stephen Dye, Analyst specializing in Deposit Access, stephen.dye@firstannapolis.com

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