Because federal regulations threw a wrench into the debit card industry as it prepared for EMV, merchants will be accepting primarily EMV credit cards when the liability shift hits in exactly three weeks.
The Durbin amendment's Regulation II, calling for an application identifier on debit cards that would include at least two unaffiliated networks for routing, created a delay of several months in getting chip-based EMV debit cards coded properly and issued.
As such, merchants have been holding off on preparing for EMV debit, at least until after the busy holiday season, while also waiting for issuers to get more cards in the hands of consumers.
That process is in full swing as 90% of U.S. financial institutions either have begun issuing EMV debit cards or plan to do so by the end of the year, according to the 2015 Debit Issuer study from Pulse, Discover's ATM and debit network company.
The U.S. hits its long-awaited EMV liability shift on Oct. 1. That's when the party unable to accept chip-card technology becomes liable for fraudulent mag-stripe transactions at the point of sale.
Based on the issuer's plans, 25% of U.S. debit cards – approximately 71 million cards – will be migrated to chip by the end of 2015. The percentage is expected to rise to 73% by the end of 2016 and 96% by the end of 2017.
This year's Pulse study "provides the most compelling evidence so far that we are quickly approaching the end of magnetic-stripe-only cards and entering the era of chip cards," Steve Sievert, executive vice president of marketing and communications for Pulse, stated in a Sept. 10 press release. "With fraud continuing to be a major concern among cardholders and a top priority for financial institutions, the issuance of chip cards represents a major step toward reducing losses from counterfeit cards."
The majority of issuers, 62 %, plan to implement chip debit cards using an accelerated migration strategy that includes combining natural reissuance when their account holders' debit cards expire, with a targeted reissuance to heavy card users, international travelers and other customers who request a chip card.
The other approaches are natural migration, used by 23% of issuers, when cards expire and mass migration, used by 15%, to quickly convert all cards.
Issuers will include the so-called common AID on all of the newly issued EMV debit cards. Most are planning on making chip-and-PIN the preferred approach to their cardholder verification method.
While chip-and-PIN is common for debit transactions, the card brands and merchant organizations have tussled over chip-and-signature vs. chip-and-PIN on the credit card side for EMV. Merchants generally seek the stronger security of adding a PIN, while some card networks, particularly Visa, favor signature and fear changing consumer habit and driving up merchant costs with PIN pads.
Financial institutions estimate the cost of a chip debit card will be double that of a standard magnetic-stripe card, Pulse reported. Large banks report the lowest average cost of $2.17 per chip card, while credit unions have the highest average cost at $2.90 per chip card.
Based on the higher cost of chip cards, financial institutions will spend an incremental $69 million to replace magnetic-stripe cards with chip cards in 2015 and $266 million overall for the entire migration period, according to the study.
"The industry's migration to chip debit cards is not motivated by the promise of profits," said Tony Hayes, a partner at Oliver Wyman who co-led the study. "Instead, issuers report that they are investing to help safeguard cardholder information, enhance the integrity of the overall payment system and protect their own reputation."
More than 70% of issuers cite fraud as a key challenge for their debit business. Every financial institution participating in the study reported their cards were associated with a data breach in 2014. However, less than one percent of all cards experienced fraudulent activity.
Overall, issuers reported losses of 0.7 basis points to fraud when the debit card was used with a PIN and 6.1 basis points when the card was used with a signature. These reported loss rates translate into 0.3 and 2.2 cents per transaction, on average, for PIN and signature debit, respectively.
During the past decade, PIN debit loss rates reported by issuers have stayed constant from 0.6 to 0.7 basis points, while signature fraud loss rates have increased by 30 percent from 4.7 basis points in 2005 to 6.1 basis points in 2014.