U.S. EMV in 2013, and a Look Ahead
U.S. payments industry deployment of EMV technology accelerated in 2013 to help combat rising card fraud, but widespread industry adoption still faces multiple obstacles. Merchants remain suspect about EMV investment, and while the debit industry took steps toward a common debit application, those initiatives were significantly disrupted by Judge Leon’s July ruling on Durbin regulations. Despite clear progress, these obstacles have created additional uncertainty about the ultimate timing of an EMV rollout.
U.S. payment card fraud increased 14.5% in 2012 to $5.33 billion, with U.S. counterfeit fraud alone accounting for 26.5% of all global card fraud in that year.1 The U.S. is the only global region with consistently rising counterfeit card fraud, the type of fraud most easily addressed by EMV. This increased fraud, combined with decreased profitability on debit portfolios, prompted many U.S. issuers to prioritize EMV planning for the first time in 2013. The first U.S. card network liability shift and processor compliance milestones also arrived in 2013, prompting increased activity from other industry participants (Figure 1).
Figure 1: Network-Announced Migration Timelines
Source: Network statements and releases.
On April 1, 2013, major card networks mandated that acquirer processors certify their ability to support U.S.-based EMV transactions. Although many acquirers do not publicly support the EMV rollout, Visa announced in early April that acquirers representing “the vast majority of U.S. face-to-face sales volume” had completed certification requirements. On the same date, MasterCard implemented a liability shift for cross-border Maestro transactions at domestic ATMs despite complaints from U.S. ATM deployers about the aggressive timeline.
Large Credit Issuers and Retailers Begin the Chip Transition
Most of the largest U.S. credit issuers began making chip cards available to subsets of their domestic portfolios throughout 2013 (Figure 2). The EMV cards currently in the market use a mixture of “Chip & PIN” and “Chip & Signature” cardholder verification methods (“CVM”), and 2013 provided no clear direction on which CVM will eventually prevail in the U.S. market. To date, EMV card replacements have been voluntary (i.e., by customer request) and specifically targeted at travel-related co-brands and other high-end, affluent cards. By the end of 2013, however, some large issuers began proactively issuing chip cards to frequent international travelers.
Figure 2: Consumer EMV Issuance by the Largest U.S. Credit Issuers
Source: FI websites and public statements.
Many of the largest “big-box” retailers spent 2013 upgrading POS hardware and PIN pads to support chip-based cards, and some large acquirers have stopped shipping any new terminals that are not EMV capable. It is not clear if the necessary terminal software is currently in place to enable an actual EMV transaction at these upgraded locations, but the POS investments provide evidence that many large merchants are quietly preparing for a market-wide EMV transition in the near future.
Some merchant segments remain less supportive, however. During a spring industry conference hosted by NACHA, representatives of the fast food and petroleum industries registered strong public opposition to enabling EMV given their low fraud losses and unique POS environments. At the same time, new payment technologies such as Bluetooth low energy (which is sensor-based) and mobile barcode payments (cloud-based) have contributed to the uncertainty. Given this complex environment, a significant number of mid-market merchants have not yet begun to make preparations for EMV acceptance.
Debit Routing Regulations Add to EMV Complexity
Deploying EMV for debit has been challenged from the outset by the dual network structure (i.e., single message and dual message) in the U.S.. The multiple unaffiliated network requirements of Reg II further complicate deployment, as the EMV standard (developed for other markets) was not designed to support multiple applications. Both Visa and MasterCard offer a common debit application, while the major PIN debit networks (represented originally by the SRPC and, more recently, by the Debit Network Alliance) announced in early 2013 that they were supporting the common debit app offered by Discover (D-PAS).
By late July, the PIN networks relaxed their position concerning exclusivity of their preferred solution, and on July 30, Visa and MasterCard announced an agreement to cross-license their respective common applications. Although the resolution did not fully solve the technical challenges, the industry momentum was promising.
This progress was suddenly and unexpectedly slowed the very next day however, when U.S. District Judge Richard Leon ruled that Reg II was flawed in both its interchange calculation and in its debit routing standard. Industry working groups continue to discuss the technical implementation requirements for debit routing as the court battle plays out, but debit EMV planning at most issuers has completely stopped. Even credit EMV planning has been significantly slowed as issuers determine whether to split their debit and credit project planning or delay all EMV issuance.
2014 and Beyond
The next major network rule change regarding EMV adoption occurs in October 2015, when a liability shift will apply to POS transactions on all major networks and the risk of most preventable fraud losses transfers to the least-secure party (merchant or issuer). Credit EMV issuance in the U.S. is expected to continue through 2014 in anticipation of this liability shift, as large credit issuers include more chip cards in their normal re-issue cycles and some small and mid-size issuers begin their transitions. Many industry participants hoped that the networks would delay the POS liability shift due to uncertainty around the debit appeals process, but MasterCard recently reaffirmed its October 2015 date in a statement to issuers.
The U.S. chip card transition continues to face headwinds, but the increase in U.S. EMV activity in 2013 was real and tangible. Recent activity amplifies the risk of counterfeit fraud loss for credit and debit issuers who fall “behind the pack” in adopting chip cards. The long lead time required for EMV design and testing will force many banks to act swiftly in 2014 if they hope to be ready when the rest of the market adjusts. Despite industry uncertainty, any issuer that does not already have an EMV plan in place should begin having focused conversations with their card processing, card production, and network brand partners to determine the EMV capabilities, costs, and incentives applicable to their portfolios. This information will be necessary to inform key decisions about complex EMV issues (such as CVM management) and help each issuer design an effective and comprehensive launch plan in advance of 2015.
1 The Nilson Report #1023 (August 2013)
For more information, please contact Stephen Kiene, Consultant, specializing in Debit & Prepaid,firstname.lastname@example.org.
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