The U.S. may not follow other countries' lead in forcing EMV chip-card users to use a PIN, but data from a biannual Federal Reserve Board survey indicates there is value to sticking with PIN.
A key industry debate has centered on whether chip-and-PIN transactions are more secure than chip-card transactions that use only a cardholder's signature. Those that favor signature say it is faster and easier to deploy than PIN.
But signature-only transactions are tied to higher fraud losses. Signature transactions accounted for $1.13 billion of fraud losses in 2011 while PIN accounted for $204 million, the board says. These figures cover all U.S. cards, which are primarily magnetic-stripe cards.
Mark Horwedel, CEO of the Merchant Advisory Group, says the Fed's newest data "simply reinforces what we've been saying and what the networks know, that PIN is far superior to signature."
Even so, many of the U.S. issuers planning to offer EMV cards expect to issue signature-only cards.
Visa argues that chip-and-signature allows merchants to more quickly adopt EMV technology, while eliminating the cost of PIN readers. MasterCard, by contrast, talks up chip-and-PIN's fraud-prevention record.
The Fed released its survey data last week when announcing it would not adjust its cap on interchange rates. In early 2012, the Board surveyed payment card networks and covered bond issuers to collect data on interchange fee revenue, issuer costs, and issuer and merchant fraud losses for 2011.
Merchants can't expect a good return on EMV investments until the industry declares a "sunset" on the current magnetic-stripe technology within 24 months of the card networks' liability-shift deadline October 2015, Horwedel says. The networks require most U.S. merchants to have the hardware in place to accept EMV payments by this date. The penalty for missing the deadline is a liability shift for fraud.
To further promote PIN, acquirers should "immediately get rid of signature when issuing any EMV device," Horwedal says.
The Fed survey also revealed that, by volume, signature networks processed 98% of chargebacks and 84% of returns. PIN networks processed the remaining 2% of chargebacks and 16% of returns.
By value, signature networks handled 98% of chargebacks and 88% of returns, the report says.
The Fed report states issuers' authorization, clearing and settlement costs averaged 5 cents per transaction in 2011. As in 2009, the average ACS cost for a PIN transaction was lower than that for a signature transaction, but the gap has narrowed, the Fed says.
In 2009, the average ACS cost was 8.4 cents per signature transaction and 5 cents per PIN transaction, a difference of 3.4 cents. In 2011, the average ACS cost was reported as 5.5 cents per signature transaction and 3.1 cents per PIN transaction, a difference of only 2.4 cents.
Another factor in the ongoing EMV migration is the discussion over a common code for routing EMV debit transactions to multiple networks, as mandated by federal law.
The debit routing poses a challenge for the U.S. payments industry because of the number of debit networks, compared to other countries with single networks. The Durbin amendment mandates that merchants have a choice of at least two networks to route transactions. Current EMV technology does not accommodate this.
Visa has proposed use of its technology for establishing a common code, but regional networks are balking at that option, saying they will develop their own.
"The [Electronic Transactions Association] remains concerned that we still, as of today, do not have a debit routing solution that addresses all of the concerns ETA has raised about the various card network proposals," says Jason Oxman, CEO of the ETA.