Chip-and-Pain: EMV Subscriber Snafu May Go Beyond Netflix

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When Netflix announced that its new U.S. subscriber count had declined 10.2% year-over-year, it blamed the "ongoing transition to chip-based credit and debit cards." And the video-streaming company may not be the only victim of this phenomenon.

In anticipation of the Oct. 1 EMV liability shift for U.S. companies, many issuers mailed out new chip-enabled cards to customers, often with new account numbers or expiration dates. This meant companies like Netflix, which rely heavily on subscription revenue, would encounter difficulty billing the large segment of consumers that received new cards.

The online streaming video giant argued that the large number of reissued cards as a result of the shift had caused customers – new and old – to drop out of Netflix when their old account number was declined, causing "involuntary churn."

"It's likely multifactored, there may be other things going on here, but certainly the transition to the chip cards is not helping," said Chief Financial Officer David Wells in an earnings report interview posted on YouTube.

The problem Netflix faces is more painful to online businesses, which must deal with the fallout of the EMV conversion while enjoying none of the benefits (EMV is designed to prevent the counterfeiting of physical cards).

Online and card-not-present businesses, particularly those that operate on a recurring subscription model, are "about to face significant changes," said Kathy Greenler Sexton, the CEO and publisher of Subscription Insider.

A September report published by Subscription Insider and Paul Larsen Consulting suggested that the percentage of cards identified as outdated on recurrent billings spiked due to card reissuances prompted by the Home Depot, Neiman Marcus and Target breaches. The percentage dropped in April, but rose again in May when the first wave of EMV chip cards were mailed to U.S. consumers, according to Sexton.

"The old world of 'set it and forget it' of credit card processing in the back office is over," warned Sexton. "A merchant that is not prepared is going to see negative results on profitability and revenue."

But banks are not totally ignoring this issue, and are doing what they can to smooth the transition from magstripe to EMV-chip cards, said Julie Conroy, a research director at Boston-based Aite Group in an email to PaymentsSource.

"I could see how the migration could have a slight impact on businesses with recurring revenues," she said, but "I think Netflix is using EMV as a whipping boy for their customer attrition."

For example, some issuers have instituted a grace period during which the old card remains valid, or have tied the old account number to the new card.

To reduce accidental membership drops, merchants can check their customers' credit card information against an updated database of card numbers maintained by credit card companies.

The service, called Account Updater, is provided by Visa, MasterCard, Discover and more recently American Express, on a beta trial basis.

It accounts for 70 to 75 percent of credit cards, according to Paul Larsen, managing partner in the Fishkill, N.Y. consulting firm that shares his name.

Still, this leaves out a non-negligible number of customers, he noted, advising companies to tap into Account Updater more regularly as a result of the shift to chip cards.

"Every card is being reissued, so there's tremendous pressure on the life value of subscriptions right now," he said.

But even companies that anticipated this challenge are facing a more cumbersome process of handling card payments.

"We really want to reduce the friction of renewal and reduce the friction of having any sort of interaction where you have to update your payment method," noted Netflix's Wells during the earnings interview. "It just means that there's more noise introduced into that." 

Netflix did not respond to requests for comment.

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