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America's Biggest EMV Issues Affect the Smallest Stores

At the four-month mark after the U.S. EMV liability shift went into effect, it's still a waiting game; larger issuers and merchants tend to be on top of the chip-card situation and many smaller ones are not, but experts say it's too early to draw conclusions.

But one thing is clear: As more issuers move ahead with EMV, more merchants — especially those in high-risk categories — are starting to feel the sting of last year's liability shift.

The concern stems from merchants who are unable to move fast enough to put in EMV-compatible equipment, thus exposing themselves to fraud liability under the card networks' new rules. EMV-chip cards are designed to reduce counterfeit fraud, but they only work if all parties involved in the transaction can handle the new technology.

"I've spoken with many merchants who are feeling the pain of experiencing charge-backs from point-of-sale transactions for the first time," said Julie Conroy, a senior analyst for Aite Group, while declining to provide details about the affected merchants.

Retailers at the greatest risk for counterfeit card fraud when accepting magnetic stripe cards are those with a high proportion of higher-ticket items that are easy to resell, experts say. And while supermarkets and restaurants aren't in that highest-risk group of merchants, those and other types of general-merchandise stores will also find themselves in fraudsters' cross-hairs as the window of opportunity for committing counterfeit crime at the point of sale begins to narrow.

About 70% of U.S. consumers now have at least one EMV card in their wallet, according the EMV Migration Forum, and most large and midsize financial institutions complete their portfolio rollouts during the first half of this year.

The U.S. is on track to hit of peak of 617 million cards issued this year, compared with 600 million last year, according to ABI Research, which predicts EMV card production will decline 5% in 2017 as the U.S. approaches chip-card saturation.

Observers say merchants are facing more than just an increase in counterfeit card fraud. Fraud is going in new directions beyond merely counterfeiting card data stolen from magnetic stripe cards, which is what EMV card technology aims to prevent.

"I've heard from dozens of merchants that are having huge spikes in charge-backs that are five to 10 times above normal rates…it's a mess," said Steve Mott, an analyst with BetterBuyDesign.

One problem, according to Mott, is confusion in sorting out who's actually liable for the loss when transactions go wrong. In the wake of the EMV liability shift, issuers are "pumping" problematic transactions back to merchants to determine which party will absorb the loss, when it's not always clearly attributable to counterfeiting

"There are systemic problems [in defining the parameters of fraud] at the network level, with issuer risk-management systems and with issuer charge-back systems," Mott said.

Issuers generally declined to share their results so far in coping with fraud after the EMV liability shift, but one credit union claims its payment card fraud rates have plummeted.

St. Paul, Minn.-based Affinity Plus Federal Credit Union's payment card fraud rates dropped 64% since completing its EMV card conversion in October, and it saw a 48% drop in disputed transactions between September and December 2015, the credit union said in a press release last month.

"Based on our preliminary data, the reduction we have seen in fraudulent activity—combined with the overwhelmingly positive customer support we've received—makes [the EMV shift] a win," said Dave Larson, president and chief executive of Affinity, in a press release.  St. Paul, Minn.-based Affinity has a portfolio of about 60,000 credit cards and 118, 000 debit cards.

The nation's largest credit union, Navy Federal Credit Union, is not so quick to claim a major change in card fraud. Though Navy Federal is well along in the process, with more than half of its credit cards chip-equipped and the majority to be converted before the end of this year, "it's too early to make many assertions about the effect of card fraud from EMV," said Matthew Freeman, Navy Federal's manager of credit card products.

It typically takes at least 60 to 100 days for the process of investigating a disputed transaction to determine its cause and who's liable, Freeman said.

Navy Federal is taking its EMV program a step beyond most issuers; it's giving cardholders the option to add a PIN to their chip-enabled credit or debit card, providing an extra layer of security to help block fraud from lost and stolen cards, Freeman said. Most U.S. issuers are using the chip-and-signature approach, but most other nations require a PIN, and Navy Federal's customers who travel frequently welcome that option for convenience and security, Freeman said.

Beyond counterfeit card fraud at the point of sale, the payment card industry is also watching to see whether the EMV shift will drive more card fraud from face-to-face transactions to e-commerce purchases. That phenomenon was documented in the U.K. and Canada when those countries shifted to EMV over the last decade.

But most analysts say there will be a muted effect on e-commerce fraud from the EMV transition, if anything.

"The U.S. is a very mature market when it comes to e-commerce and our EMV transition is happening at a time when more sophisticated e-commerce fraud tools are available for merchants," said Alex Johnson, head of the credit service at Mercator Advisory Group. If card fraud shifts to e-commerce channels in the wake of the U.S. EMV migration, it likely will be a "less pronounced" effect than what other nations saw, he predicted.

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