Could the cost of preparing the U.S. retail market for EMV smart-card technology over the next few years create problems for some retailers, adding to their burden in an already fragile economy?
Industry observers agree EMV creates a tough economic decision for smaller merchants, but most small merchants won't even pay attention to the EMV migration, says David Kaminsky, analyst for emerging payments with Mercator Advisory Group.
Kaminsky published research last week essentially forecasting a delay in EMV migration from the card networks' October 2015 liability shift deadline, saying about 80% of U.S. merchant terminals will be capable of accepting EMV by 2019, and consumers will use and understand Near Field Communication [contactless] technology widely by 2017.
The EMV standard, commonly called chip-and-PIN in other countries, improves security over magnetic-stripe transactions when used with the proper terminals at the point of sale. The U.S. is adopting this technology, nudged along by liability-shift incentives set by the card networks.
While the tasks at hand "won't affect the economy at a macro level, like Gross Domestic Product, the longer it takes to complete EMV migration the more international fraud will migrate to the U.S.," Kaminsky says. On the flip side, even when the EMV migration is complete, fraud will continue to be a problem in the card-not-present environment, he adds.
"It's a requirement, not a mandate, so small merchants will probably be willing to risk the liability shift," he adds. "They won't be concerned about fraud until it happens to a neighboring merchant, or they get hit themselves with fraud costs."
Fraud may not be a close enough threat to convince smaller retailers to buy new payment terminals, says Paul Martaus, a merchant acquirer consultant and industry researcher for Mountain Home, Ark.-based Martaus & Associates.
Many small retailers may never convert to EMV because they believe a mobile-payment technology such as Near Field Communication will override the need for smart cards in the next two to four years, Martaus says.
"Issuers are going to issue the minimum requirement of EMV cards to satisfy the networks because they know the industry will continue to search for alternatives to chip-based cards and NFC," Martaus adds.
Richard Crone, chief executive of San Carlos, Calif.-based payments consulting firm Crone Consulting LLC, agrees that smaller merchants will likely hold out for something less costly than EMV.
"By the time the EMV deadline comes into force, we will have seen proven results from cloud-based and mobile payment as much stronger capabilities than EMV and NFC," Crone says. "Many players will question whether they should bother making the investment in EMV because there is no return on that investment, and that is a big economic factor for them and the overall economy."
A cloud-based system eliminates much of the need for a merchant to add hardware, Crone says. In addition, cloud-based systems eliminate security concerns at the point of sale, he says.
"We are on the edge of this change and that's the economic factor to look at," Crone says. "The big question is: will EMV be an irrelevant investment?"
However, the card brands and some acquirers continue to point to the significant decrease in fraud losses as their business case for EMV migration.
Chase Paymentech Solutions issued a white paper in late 2012 forecasting fraud losses in the U.S. on credit, debit and prepaid cards to reach $10 billion by 2015. But those numbers create a scenario in which "the cost to migrate the entire U.S. payments landscape to EMV could be recovered within one year — largely attributed to the savings that could be recognized in fraud losses alone," Chase says.
However, an October 2012 Javelin Strategy & Research report cites the National Retail Federation as having a much higher estimate for the costs merchants will bear in upgrading their hardware. The retailer group says EMV smart card conversion will cost about $35 billion in the U.S. market.
A Javelin study from 2010 was more closely aligned with Chase's figures, estimating the basic cost of deployment for EMV in the U.S. at $8.6 billion. Javelin forecast POS terminal deployment at $6.75 billion, with merchants bearing the brunt. The research indicated card issuance could cost $1.4 billion, while retrofitting or replacing bank-owned ATMs could cost $500 million.
If nothing else, the numbers illustrate how many variables are involved in EMV migration.
Despite the high costs, "EMV migration shouldn't affect the economy because of the way the card brands set up the migration deadlines," Martaus says.
Top retailers, such as Wal-Mart, have been preparing for EMV already, which is why processors and acquirers have to be ready to service them by April of this year, Martaus says.
To ease the pain of upgrade costs, Visa Inc. provided larger retailers an incentive to avoid PCI compliance costs if more than 75% of their card transactions were processed on EMV-compliant terminals by October 2012.
But few retailers, if any, are enjoying that cost break because all of the software is not in place to transmit EMV payments, Martaus says. Indeed, the industry continues to debate the common code needed to follow federal regulations for routing EMV debit-card transactions.
On the other hand, the liability-shift deadlines are still years away. Economics aside, merchants are generally "loath to spend more money and replace hardware at the point of sale," Crone says.
"It's not a slam dunk one way or the other on how it could all affect the economy because there are so many moving parts in the EMV migration," Crone adds.
Gil Luria, analyst with Los Angeles-based Wedbush Securities, says, "I do not expect the migration from magnetic stripe to EMV to have a meaningful impact on the economy … consumers will not notice much of a difference since they will not have to pay for new cards or terminals or any part of the transaction."
Retailers and issuers will bear most of the cost, but will hopefully see a corresponding reduction in fraud costs, Luria says.
"A new terminal is not a significant expense item for most retailers," Luria says. "Even a 3,000-store chain with 20 lanes such as Target would only need to spend $30 million on its entire store base, which is miniscule for a company with more than $50 billion of overall expenses."
Douglas King, a payments risk expert at the Atlanta Federal Reserve Bank, last week made the argument in his blog that the payments industry may be overhyping the potential savings on fraud losses.
King argues that fraud represents a small expense on most issuers' ledgers and that EMV helps reduce fraud in face-to-face transactions, but not in the growing card-not-present space.
"I believe a business case for EMV built around fraud losses will remain difficult to build," King says.