Are U.S. merchants ready for a contactless surge?

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The U.S. is already very late to the party when it comes to contactless payments. But even so, there are signs that many merchants still aren't prepared for an influx of contactless cards.

A new Visa rule took effect April 13, requiring the phase-out of older contactless payment technology that reads magnetic stripe data (MSD) instead of EMV contactless chip data. Visa disclosed the new contactless chip acceptance requirements in October 2017 in an industry bulletin, noting there is no need to enable contactless acceptance in the U.S., but for those that do, terminals must meet the full EMV chip data requirements.

In the example of JCPenney, this had the unintended consequence of causing the retailer to pull the plug on accepting mobile wallets like Apple Pay and Google Pay rather than absorb the cost of an upgrade.

Other merchants could get caught in the same bind, observers say, as U.S. card issuers this year aggressively roll out contactless credit and debit cards. JPMorgan Chase last year committed to contactless for all new and replacement payment cards beginning this summer, and other issuers including Wells Fargo said they're following a similar road map.

“As consumer preference for contactless payments continues to grow, migrating from MSD to the EMV contactless standard is essential to improving payment security and interoperability while creating a superior customer experience,” Visa said in the original bulletin.

Sticking with MSD contactless leaves a hole for fraudsters to exploit, because the older technology lacks the one-time cryptogram to block transaction replication.

The latest generation of contactless cards typically are manufactured to the new specification so they will only work at payment terminals that accept EMV contactless. Merchants that have not upgraded their payment terminals to EMV contactless may frustrate consumers who will expect their new cards to work.

“The first generation of EMV chip cards are reaching their expiration date and many issuers are replacing them with dual-function cards that support contact and contactless payments,” said Rodman K. Reef, a principal with Reef Karson Consulting in Larchmont, N.Y.

Most merchants relied on their acquirers to guide them through the U.S. EMV migration around the time of the card brands' October 2015 EMV liability shift. Similarly, acquirers should be atop the current requirements for EMV contactless, according to payment industry experts.

JCPenney, which has been through recent management changes and sales declines, may have been grappling with other considerations, observers say.

“There may be a few other companies, in the same or similar condition, who make the same decision. My guess is that JCPenney saw that Apple Pay, etc., were a very small part of their volume and therefore they made the decision to turn it off, at least temporarily, until they could justify the effort to upgrade,” Rodman said.

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