Merchants that postponed their EMV migration are feeling the sting of losses connected to the EMV liability shift. They are now shoring up their fraud defenses and—in some cases—speeding up their EMV-migration plans.
Nearly six months after the Oct. 1, 2015 EMV liability shift went into effect, many retailers that have not yet upgraded to the EMV chip card standard are complaining of a spike in chargebacks on disputed transactions that payments industry experts say is causing them to rethink their strategies.
No longer are merchants with high-ticket, easily fenced merchandise like jewelry and electronics the only ones considered to be exposed to high potential losses from counterfeit card fraud. Supermarkets and other retailers are being victimized by crooks who use counterfeit magstripe cards to buy high-denomination gift cards, which don't have EMV chips but can still be used at EMV-compliant merchants.
Some gift card sellers that have not yet embraced EMV are changing the way they sell high-denomination cards, at least in the short term. In certain cases, they are requiring customers to pay for gift cards with cash or use a PIN with a payment card, and asking for additional identity verification, industry experts say.
But others are starting to see this as a pain point that is best addressed by EMV, and are fast-tracking their plans to accept chip cards.
Kroger Co., the nation’s largest operator of regional-brand grocery stores, recently began switching on EMV card-processing at many of its 2,774 stores, just days before the Cincinnati-based company announced operating costs rose during the fourth quarter of 2015 due to EMV-related losses.
Kroger’s operating costs rose 23 points during the quarter ended Dec. 31, in part from higher chargeback losses stemming from the EMV liability shift, J. Michael Schlotman, Kroger’s chief financial officer, told analysts on March 3.
The chain's EMV conversion likely would be complete by the end of this month, Schlotman said. PaymentsSource confirmed that hundreds of Kroger stores across the U.S. within the past few weeks activated EMV card processing for the first time, including stores operating under the brands of Fry’s Food & Drug in Arizona, Fred Meyer in Oregon and City Market in Colorado, among others. Kroger could not be reached for comment.
"We are seeing an acceleration of interest in EMV from some of those merchants that had chosen, for whatever reason, to delay EMV migration until they saw how things were going to shake out," said Randy Vanderhoof, director of the EMV Migration Forum.
Though issuers implemented new policies for suspected counterfeit card transactions last fall, the reporting process can take "several months," so many retailers didn’t know their financial liability on potentially fraudulent transactions until recently, Vanderhoof explained.
"The chargeback process can be slow, but now that those numbers are working their way back to merchants and their liability is rising, it’s created more of an urgency for merchants to upgrade," he said.
Some retailers are taking new steps to guard against counterfeit losses, including limiting or controlling the sale of gift cards, according to gift card giant Blackhawk Network.
"A few retailers that are not yet EMV compliant have temporarily restricted sales of higher-value, open-loop gift cards," said Teri Llach, Blackhawk’s chief marketing officer. Other retailers lacking EMV that are in doubt are stepping up identity verification to offset fraud risk in selling gift cards, she added.
In a conference call with analysts on Feb. 24, Blackhawk President and CEO Talbott Roche warned of possible “headwinds” on gift card sales in 2016 as retailers cope the EMV liability shift.
The problem could be more acute for many regional supermarket and convenience store chains and other midsize retailers that are still not EMV-ready, said Mallory Duncan, senior vice president and general counsel at the National Retail Federation.
"The largest merchants with big I.T. departments were first to act on EMV, and small merchants with just one register can easily buy an EMV-certified terminal, but midsize merchants are stuck, because it takes them longer to upgrade multiple registers and checkout lanes, and now they’re getting hit by chargebacks," he said.
Supermarkets are a mixed bag in terms of EMV readiness, and losses from fraudulent sales of gift cards—as well as other high-ticket merchandise stores sell—could cut deep, said Rodman K. Reef, a payments consultant.
"Just like jewelry and electronics, gift cards have street value so the crook can use it or sell it almost like cash," Reef said. "Along with higher chargebacks across the board, these potential losses are a big concern to midsize merchants."
Retailers' exposure to gift card fraud at stores that aren't upgraded to EMV isn't entirely surprising, said Catherine Murchie, a senior vice president at MasterCard. "This is similar to what other markets experienced as they adopted EMV," she said.
Visa did not provide comment for this story by deadline.
Albertsons Companies, which operates 2,267 supermarkets in 33 states, including Safeway, Vons, Jewel-Osco, and Shaw’s, still has not made the move to EMV at most of its stores. The company announced plans last year launch an initial public offering, but in October 2015 the company postponed it, citing market volatility, and the plan remains on hold.
Trader Joe’s switched on EMV at its 457 stores last year, but Whole Foods, one of the first national merchants to support Apple Pay in October 2014, has not enabled EMV card acceptance in its 431 stores (Apple Pay adds EMV security to any cards enrolled). Whole Foods did not return calls for comment.
Pittsburgh-based Giant Eagle also has not yet switched EMV on at its 229 stores, but a spokesperson said the company is prepared to do so soon. Giant Eagle has not experienced any losses directly tied to gift card fraud, the spokesperson said.
Merchants have faced many obstacles in implementing EMV, said Mark Horwedel, CEO of the Merchant Advisory Group.
First, many retailers were loath to implement EMV during the all-important fourth quarter, fearing a sales slowdown from the learning curve required for personnel and customers. Another concern was the length of the EMV transaction itself. "Contact-card EMV transactions simply take longer to complete, and for most retailers, the busiest time of 2015 was the worst possible time to introduce EMV," Horwedel said.
Many retailers are also held back on EMV migration because they haven’t been able to get terminals certified by the payment networks, for various reasons. "There aren’t enough EMV-certification resources available for the job," Horwedel said.
Some merchants are waging a legal war. B&R Supermarket Inc. and Grove Liquors LLC filed a lawsuit last week in U.S. District Court challenging the card networks, the largest banks and the EMVCo. with a class action.
"It’s hard to know whether there’s been an actual increase of fraud in the midst of all the recent chargebacks," Horwedel said. "It could be that issuers are making mistakes, because this is all a very new process and they might be throwing a lot of transactions—including those that aren’t actually counterfeit card fraud—back at merchants to see which ones stick."
Other factors behind the chargeback surge could be criminals are realizing the window for committing counterfeit fraud is closing, and consumers guilty of friendly fraud, who may be exploiting the confusion around the EMV liability shift to contest legitimate transactions for personal gain, Horwedel said.
And some retailers may simply underestimate the amount of real counterfeit card fraud in the system now that issuers aren’t absorbing it, he said. "On balance, I do believe this experience with chargebacks will influence some merchants to take action quite soon on EMV."
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Corrected March 16, 2016 at 10:25AM: An earlier version of this story incorrectly stated that MasterCard did not provide comment.