The day when the United States joins many other large markets globally in converting to EMV chip-and-PIN cards from magnetic stripe versions will not occur any time soon. But it will come eventually, one observer predicts.
"At this point it's a matter of when, not if, we'll see EMV in the United States," George Peabody, director of the emerging technologies advisory service at Mercator Advisory Group Inc., a Maynard, Mass.-based firm, tells ISO&Agent. He acknowledges, however, that mag-stripe technology has many years left. "It's inexpensive. It's ubiquitous."
Discussion of how the U.S. payments industry focuses mostly on a series of what-if scenarios, there is no denying that change is afoot, and that change eventually will affect ISOs and acquirers. Merchants one day may need updated terminals, and their employees would need to understand how EMV works. ISOs and acquirers also would have to understand the technology they are selling to merchants.
Indeed, with approximately 983.4 million mag-stripe cards carrying the Visa Inc., MasterCard Worldwide, American Express Co. or Discover Financial Services brands on issue in the U.S., a sweeping metamorphosis of the U.S. payment scheme would affect every element of the payment system. And paying attention to the future today could prepare ISOs and acquirers for change, whether it comes in the form of another card, a contactless chip or inside a mobile phone.
Such a change almost occurred a decade ago in the U.S. when Visa and Target Corp. issued cobranded chip-and-PIN cards, but the retailer has since dropped the initiative. Elsewhere in the world, the number of nations adopting chip cards adhering to the EMV standard continues to grow.
EMV is an international standard for chip-based payment card transactions that requires a PIN to authenticate the cardholder, and it provides some security advantages over signature-based mag-stripe cards. The chips in an EMV card and the point-of-sale terminal engage in a two-way authentication procedure, which is especially important in offline transactions in which the merchant does not secure issuer authorizations, Peabody says.
Those payments organizations already operating where EMV is accepted will be able to draw on that experience. Those that are not would need to reprogram their systems to accommodate the new data format, Peabody says.
"The merchant would be looking at a 'forklift' upgrade," Peabody says, alluding to the replacement of many terminals. Most of the terminals the majority of point-of-sale terminal makers sell have smart card readers, and they can be outfitted with contactless readers.
Over time, the U.S. may move to a chip-and-PIN-based system, more likely as a reaction to challenges associated with international acceptance and standards than to domestic factors, Joby Orlowsky, Discover vice president of strategic initiatives, tells ISO&Agent. Discover already is rolling out chip-and-PIN products through its Diners Club International brand, he says.
Like many in the payments industry, Orlowsky maintains that mag-stripe technology has many useful years left, but alternate means of payment will evolve, such as contactless and mobile. "Convenience, security and technological innovations are likely to be key drivers behind this move," he says.
Other issues, such as external pressures, may prompt some U.S. issuers to consider chip cards, says Jack Jania, vice president and general manager of secure transactions at Gemalto North America, a unit of France-based Gemalto NV. He suggests that card-not-present fraud increasingly will migrate to the U.S. Moreover, U.S. cardholders traveling in EMV nations will experience card-acceptance problems, especially when using automated kiosks for transit transactions and other purposes.
"These factors will drive U.S. issuers to offer an EMV product," Jania says.
WHY NOT?
Thanks to a well-developed telecommunication infrastructure that makes landline telephone use inexpensive, U.S. bankcard issuers can require online authorizations of transactions made with their cards at the moment of purchase, something many countries, even in Europe, consider too expensive.
Often EMV does not require online authorization at the time of the transaction because the chip in the card authenticates itself to the point-of-sale terminal and vice versa. This means merchants can batch their transactions for transmission to processors when telephone rates are the least expensive.
U.S. issuers and merchants also likely will balk at conversion costs. As such, EMV adoption is a long-term prospect, says Cliff Gray, an associate at The Strawhecker Group, an Omaha, Neb.-based consultancy.
Eventually, payment schemes will encrypt transactions from the time the card is swiped until it reaches the issuing bank, he says. Current measures encrypt transaction data from the merchant to the processor, leaving a gap from the processor to the issuer, Gray says.
