Thousands of U.S. merchants are still holding out against EMV because they see no immediate threat from counterfeit card fraud, and business goes on. But a less obvious change in payment card acceptance may finally force them to upgrade.

As Mastercard expands to its new 2-series card account numbers this year, some merchants are hearing from their vendors that they must upgrade equipment or lose support for card payments, citing the Mastercard rule.

There is already confusion in the market over whether this upgrade requires new hardware or only new software. The answer will vary from merchant to merchant, and the clock is ticking: Mastercard set a deadline of June 30, 2017 for merchants to be able to accept 2-series cards, and if they don’t comply their acquirers could be subject to fines of up to $25,000 per month, the company said. Mastercard says it would not require the merchant to stop accepting payments.

The push for the new 2-series BIN (bank identification number) cards began years ago, and this year Mastercard began introducing card account numbers beginning with “2,” joining its existing range of account numbers beginning with “5” to accommodate explosive card account number growth in recent years. (The original compliance deadline for merchants was Jan. 1, 2017, but Mastercard last year extended it by six months, to June of this year.)

Visa and Mastercard acceptance sticker
Bloomberg News

Acquirers are bearing most of the burden of readying merchants to accept 2-series cards, which requires a software update sent to terminals, said Chiro Aikat, Mastercard’s senior vice president of product delivery.

For the vast majority of U.S. merchants, the switch to accept 2-series cards will be seamless, but Aikat acknowledged that some terminals may be too old to handle the necessary software updates.

“Terminals that are 15 or 20 years old will probably require replacement, and it’s hard to know the exact numbers of those," Aikat said.

But even merchants with newer terminals are being told by their merchant services providers that Mastercard’s 2-series initiative will require them to replace their hardware this year.

Raleigh, N.C.-based First Citizens Bank notified a merchant in Scottsdale, Ariz., who declined to be identified, that his single Verifone VX510 payment terminal, which was new in December 2011, will no longer accept cards acceptance after June 30, 2017 because it’s not equipped to receive the 2-series software update. A replacement terminal—which includes EMV and software update support—will cost $250.

According to Verifone, this terminal model is capable of receiving software updates. It is a manual process, not an automated one, handled through the acquirer.

Other small businesses could face similar challenges, and the scope of this group is unknown.

“There’s still a segment of the small- and midsize business market that’s using legacy payment equipment, and in this case (requires) a terminal replacement, but we’ve seen this to be the exception,” explained Marc Castrechini, vice president of product management at Cayan.

Analysts say payment terminals typically have a lifespan of five to seven years, but many merchants keep their hardware operational well past that range.

“There are lots of terminals out there that are discontinued and should have already been replaced, which have no software support,” said Rick Oglesby, a principal with AZ Payments Group. Common payment terminal models like the VX510 may technically be capable of handling a software update, Oglesby added, but acquirers are no longer providing software for them.

It costs a lot for acquirers to create terminal updates and distribute them, so reducing the number of terminals supported helps reduce costs, added Tim Sloane, vice president of payment innovation at Mercator Advisory Group.

“Just because a payment terminal could be updated with software doesn’t mean it will be,” Sloane said. In most cases, acquirers will contact merchants with equipment too old to easily support software updates and discuss new terminal options, which may or may not cost extra, Sloane predicts.

Acquirers that can support the 2-series BINs through a software update are working to meet Mastercard's deadline.

Cayan has made changes within its gateway and cloud-based platform to drive updates to merchant customers so they will automatically be able to process 2-series card numbers, and it’s testing the system throughout its network now. “We are using education, awareness and increased support and research to make sure there are no disruptions in authorization,” Cayan's Castrechini said.

The Electronic Transactions Association also has been working closely with Mastercard for several months to ensure a smooth transition to the 2-series account introduction, said Amy Zirkle, the ETA’s vice president of industry affairs. “We’ve conducted webinars and had discussions with senior executive groups to get the word out and make sure merchants are ready,” she said.

Mastercard said it’s unlikely it will need to levy fines on merchants in connection with the 2-series introduction.

“Noncompliance doesn’t always result in a direct fine,” Mastercard’s Aikat said, adding that “it is hard to predict” the level of effort that will be required by acquirers and merchants to complete the transition to the 2-series.

Mastercard recently began a “mystery shopping” process to gauge how many merchants are ready to accept the 2-series cards and it’s too early to draw any conclusions.

“We had to respond to a shortage of card account numbers that’s been exacerbated by tokenization and other market forces,” Aikat said, noting that growth of mobile wallets and e-commerce are driving rapid consumption of 16-digit account numbers as more merchants use tokens, or replacement account numbers, to guard payment card data. “We’re also seeing more card growth in general, from the rise of financial inclusion in emerging markets and prepaid cards, which means we need more capacity for account numbers.”

Visa, American Express and Discover face similar challenges but each is tackling the problem differently, Aikat said, including expanding account numbers within their existing BIN ranges.

“We felt that expanding account numbers within existing BIN ranges was a stop-gap measure, so Mastercard had the foresight years ago to reserve a new range of BINs in anticipation of reaching the point now where we need them now,” he said.

Merchant services providers have several options for exploring the potential effect of the 2-series push on their customer base, experts say.

Mastercard offers 2-series test cards for merchants and their providers to learn whether their terminals can process the new BIN range, which could prove to be very useful during the first half of this year, said Xavier Ayala, CEO of Eureka, Calif.-based OneSource Business Advisors, which consults payment services providers.

"Vendors looking to reach out to their merchant customers should get ahold of some 2-series test cards to troubleshoot or just to reassure customers that their terminals will be able to make a smooth transition to the new card BINs by this summer," Ayala said.

Corrected February 21, 2017 at 3:26PM: This story has been updated to clarify that Mastercard's $25,000 monthly fine applies to the acquirer, not to the merchant; and to add that Mastercard says it would not prohibit noncompliant merchants from accepting payments.