Prepaid program managers face a much different set of considerations than banks do when deciding how to deploy EMV-chip cards in the U.S.
Prepaid portfolios tend to operate on exceptionally thin profit margins, and they also have more complex distribution models, relying on partnerships with retail stores to get cards to customers. For prepaid card companies the benefit of adding an EMV chip should outweigh the cost, experts say.
Some prepaid card marketers may save money by sticking to magnetic-stripe cards for the "starter" cards sold in stores, says Cecilia Frew, senior vice president of prepaid products at Visa.
"A chip is really expensive and so [as a program manager] I'm certainly not going to put a chip in that temporary card," Frew says. "What I might do is, when someone calls, registers their card and I'm personalizing it now I might have to send a chip."
Prepaid card marketers must also weigh the value of EMV-chip cards over the other security measures they put in place. Because prepaid card marketers don't always have the same deep, long-term relationships with consumers that banks do, they have extra protections to guard against fraud. For example, the process of depositing a check with a mobile phone can involve extra steps and higher fees for prepaid card users than for bank customers.
Because of these extra protections, "the risk on these cards is relatively small versus the cost of putting a chip on it," says Madeline K. Aufseeser, senior analyst with Boston-based Aite Group.
Another argument against adding an EMV chip is that prepaid cards, particularly gift cards, carry low dollar amounts and are used just once before being forgotten or discarded, she says.
There is no point in counterfeiting a card that is drained after its first use. "The economics don't make sense" for the program manager to add security to these cards, Aufseeser says.
Prepaid cards that encourage recurring use may see more value from adding EMV. "Depending upon the issuer, if it is coming out a financial institution, they'd be more open to it [deploying EMV], because the economics on those products are better than it would be for a retailer," Aufseeser says.
MasterCard expects the entire U.S. payments card market to eventually move to EMV cards, says Beth Kitchener, a MasterCard spokesperson for U.S. markets.
"This shift is going to happen over time as the use case or business case dictates," Kitchener says.
Issuers will likely give priority to credit cards, debit cards and reloadable prepaid cards, with low-value cards such as gift cards receiving chips later. "It may happen sometime afterward, but each issuer will make its own determination," she adds.
Prepaid issuers may currently feel "a little bit removed" from the migration taking place with debit and credit cards, but MasterCard predicts "everyone is going to get there," Kitchener says.
Some prepaid cards are already there.
"Prepaid has been thinking about EMV for a long time because of issuing travel cards," says Ben Jackson, a senior analyst at Mercator Advisory Service.
Travel cards benefit from EMV chips because consumers want to use them in countries where chip-and-PIN cards are commonplace, Jackson says. For example, Travelex began offering EMV prepaid cards to U.S. residents in late 2010.
But even if prepaid card issuers are eager to offer EMV, they must deal with the same issues banks faced in determining how to route EMV debit payments under the mandates of the Durbin amendment, which requires two routing options.
"EMV, it's interesting a prepaid card is basically a debit card in that regard, so you have to have the two unaffiliated networks," Visa's Frew says. "So the same challenges that we have in debit, we're going to have in prepaid."
Daniel Wolfe contributed reporting for this story.