One of the supposed perks of EMV chip-card upgrades was that the process would enable more modern payment options such as mobile wallets. In practice, however, EMV is closing as many doors as it opens.
Part of the issue is that merchants are feeling rushed to implement and be certified in EMV to avoid chargeback risk, so they’re looking backwards at the deadline rather than forwards at the next potential technology.
"Merchants knew about this for a long time, but they didn't plan well enough to make sure they were ready when the liability shift happened," said Peter Olynick, senior practice lead of retail banking at NTT Data. "They thought they could do it quickly."
Since October 2015, companies unable to handle EMV-chip card transactions faced a shift in fraud liability. For merchants not utilizing EMV terminals, this means higher chargeback fraud that they now have to pay for.
Many merchants have already upgraded to EMV-accepting terminals but the certification providers are now backlogged with the immense demand, said Thad Peterson, a senior analyst at Aite Group. The certification process usually takes between 12 to 16 weeks per network, but it's taking even longer currently, he said.
While Peterson says merchants are on the hook for their procrastination, he concedes many merchants were waiting to upgrade until the confusion around the use of a common application identifier (AID) for debit routing was resolved, which only happened 12 to 18 months before the liability shift.
But as more merchants become certified and turn on chip readers, chargeback fraud is being shared across fewer and fewer merchants, meaning those merchants are getting hit hard, NTT Data’s Olynick said.
This fraud is the dominant factor in a merchant's desire to switch to EMV-accepting terminals, but there are other factors driving their decisions for how to implement it — and Near Field Communication-based mobile wallet acceptance isn't always a top priority.
Some merchants accepting EMV, like ShopRite have downplayed their use of NFC-compatible hardware in the process of upgrading; the grocery chain's new readers do not advertise the presence of NFC, which works at some registers but not others (ShopRite did not provide comment for this story). CVS is well-known for having disabled its NFC readers when Apple Pay launched, and seems to be in no rush to restore that functionality despite the hardware still being prominent at its cash registers.
If NFC is being pushed to the sidelines by some merchants, it may be because they are devoting their attention to other upgrades that become available when purchasing an EMV terminal, according to John Shlonsky, senior executive vice president and president of merchant services at Total System Services Inc., during the processor's analyst day in May.
"In each vertical it's slightly different and their needs are slightly different," he said. "Some want to be pulled out of PCI compliance, some are using a pure terminal solution and our job is really to build an agnostic platform."
A small business that's upgrading to EMV may favor inventory management over NFC, he said. "It's really going to be dictated by the vertical-specific merchant need."
The decisions around which non-EMV technologies to support come down to economics.
"It's not a capability issue. Sometimes merchants will turn off capabilities when they won't lose transactions by doing so, and they might pay a little less in interchange then," Olynick said.
In certain circumstances, mobile payments are characterized as card-not-present payments which come with a higher interchange rate because they are assumed to be riskier. Olynick has been to several merchants whose terminals appear with the contactless logo but the terminal has, in fact, not been set up to accept those types of payments.
Until interchange rates are readjusted to match technological advances in payments in the U.S., merchants will continue to steer consumers to lower cost payment methods. Many have argued in favor of a cardholder-present fee for mobile wallets, where the consumer is present even though the plastic card may not be.
There interchange rate conflicts are highlighted by Walmart's recent lawsuit against Visa. Because Visa promoted chip-and-signature authentication as an alternative to PIN, Walmart claims the card network is forcing the company to route EMV transactions to Visa rather than alternative and less costly PIN debit networks. Chip-and-signature transaction fees typically run a few basis points higher than chip-and-PIN transactions to reflect the higher risk of not using a PIN.
"For a merchant as big as Walmart, a couple basis points from billions and billions of dollars in transactions means you're talking about real money," Olynick said.
Some industry experts say contactless mobile payments should be even cheaper than card payments since the mobile device is more heavily authenticated (with fingerprint readers, for example) than cards.
These inquests are likely to shake out over the next few years.
But until then, merchants "have to balance usability by customers with paying the least interchange they can, optimizing the revenue on the front end," Olynick said. "It's a very complex question: What's the best combination of capabilities right now?"
And since both contactless card and mobile payment usage hasn't taken off in the U.S. like many expected, merchants aren't as worried about supporting NFC payments or marketing the capability to shoppers.
But EMV will continue to be of great concern.
According to Julie Conroy, research director of Aite Group's retail banking practice, the U.S. market will see more than $4 billion in counterfeit fraud this year. One grocery store has seen $10,000 in counterfeit fraud a month and she says that's indicative of many other merchants yet to be EMV certified.
Fraud rates won't decrease until a higher portion of transactions involve both a chip-enabled card and a chip-enabled terminal. Currently about 20% of credit transactions and 10% of debit transactions are chip-on-chip, Conroy said.
The U.S., as the last G-20 country to migrate to EMV, had a whole host of peers it could study and learn from, including those that updated without threatening NFC. But that hasn't seemed to help, Conroy said.
"Part of the challenge is that [the U.S.] is far and away the largest and most complex and most fragmented card market that's ever gone to EMV," she said. "But where we could have benefitted was with the fraud migration; we've seen these types of fraud go up everywhere that's migrated and we weren't prepared here for those similar migrations."
Daniel Wolfe contributed reporting to this story.