The U.S. migration to EMV chip cards garnered most of the spotlight in 2015, but the October liability shift was just the start.
2016 is a key year for the country's movement away from counterfeit-prone magnetic stripe transactions, coming at the same time as the payments industry’s fast-paced changes in digital technology.
But EMV does not sit on a payments island alone. Aside from the massive undertaking it created in the U.S. for upgraded terminals, debit routing codes, chip-card issuing and merchant/consumer education, the transition spawned other trends.
For all of the concern and worry expressed as the EMV timeline got closer in the U.S., the change has helped payment companies transform. Many are becoming full-service payments technology providers, a trend that will also gain steam in the coming year, because of the education and technology integration involved in EMV and mobile.
In addition, the emergence of EMV at the physical point of sale has had many merchants and security vendors busy bracing for the inevitable uptick in e-commerce fraud as criminals migrate to the easier counterfeit channel. And the debate over whether the chip technology should also call for consumers to use a PIN, rather than just a signature for authorization, never faded even though U.S. issuers were aligning more on the signature side.
EMV By The Numbers
Industry leaders and EMV proponents point to numbers heading into 2016 that suggest the conversion to a new technology and a new way for consumers to initiate a transaction is moving along at a good pace.
The holiday season may have put off some retailers from turning on EMV terminals, for fear it would slow down transaction times and hinder long shopping lines, and the certification process has endured its expected backlogs.
But the number of chip cards in circulation sits somewhere between 450 million to 500 million, or more than two cards for every adult consumer in the U.S.
"We don’t know if the number of EMV-enabled terminals will meet projections because there is no quantitative data available yet," said Randy Vanderhoof, director of the EMV Migration Forum. "We have heard that around 675,000 merchant locations are processing EMV cards today and it is growing by 50% each month, which is a significant improvement from just a few months ago."
Both credit and debit cards are working at EMV terminals, including the common application identifier for debit that had stalled the EMV process as the industry determined how it would apply that technology to comply with Durbin amendment routing mandates, Vanderhoof said.
Those retailers who have turned on EMV terminals are reporting about 70% of their transactions as being chip-on-chip, Vanderhoof added. "That tells us that consumers with chip cards who shop frequently in those stores are doing chip transactions frequently."
Visa released numbers when the 2015 holiday shopping season started, indicating Visa merchants reported a 42% increase in chip-on-chip transactions from September to October, jumping to $8.9 billion from $4.8 billion.
Visa said its issuers had put 180.6 million EMV cards in the hands of customers through the end of October, while the number of merchants accepting chip cards rose to 592,000, a 49% increase over September, and that number was expected to grow quickly through the end of the year. Visa projects that seven in 10 Americans now have at least one chip card in their wallets.
"As I talk to big banks, they’re seeing close to 20% chip-on-chip in their card present transactions, which I think is actually good traction given all the challenges that the U.S. migration presented," said Julie Conroy, research director and fraud expert with Boston-based Aite Group.
Those challenges included no government support in education and a highly fragmented market, Conroy said.
Merchants not accepting EMV at the point of sale are quickly finding out through their first post liability shift statements how costly counterfeit fraud losses can be, Conroy added.
"I think these statements will serve as a strong motivator for most merchants who were hesitating," she said.
EMV's pace was steady and growing at credit unions as well, indicating the country's largest issuers weren't the only ones pushing for the stronger security measure. Des Moines, Iowa-based The Members Group, managers and technology providers for credit union portfolios, reported 27% of its portfolio has converted to EMV.
However, 98% of TMG's clients have completed their credit card EMV projects, said Chole Casber, TMG product manager. In addition, 30% have completed or "are in flight" with debit EMV, Casber added.
"That number is expected to increase to nearly 80% by the end of 2016," Casber said. "Portfolio-wide, TMG is seeing EMV transactions increase 60% to 70% month-over-month since October."
PIN Debate: Still Raging
The industry debate about adding PIN to the EMV authorization process, rather than just requiring the cardholder's signature, had been a side issue since the liability shift was first established three years ago. It has not lost steam.
Retailers felt the added security of PIN helped justify their expense in doing the needed EMV upgrades. The card brands, Visa in particular, fell on the side of having issuers stick with signature authorization so as to speed up the migration, avoid extra PIN pad expense for retailers and concentrate more on counterfeit fraud, rather than lost or stolen, which PIN helps defuse but is a far smaller percentage, at about 8%, of overall fraud.
Even though it didn't translate to any extra legal strength or a desire to move the argument into the courts, some retailers applauded a move by the U.S. attorneys general to recommend to Congress that PIN should be part of the process.
New Look: Companies Change with Times
The migration to EMV and the accompanying rise of mobile wallets also put payments equipment and software providers, and processors, in more consistent contact with merchants.
That’s created new branding for providers, one that Verifone CEO Paul Galant acknowledged during his company's fourth-quarter earnings report, saying his company will continue its transformation into a full-service payments provider, rather than simply a manufacturer of payment terminals.
MasterCard and Visa both began emphasizing tokenization services as a complement to EMV and a key aspect of mobile payment security.
"I'm not sure EMV was the trigger [for company transformations], but EMV forced the relationship with retailers to expand because of the knowledge gap," said Thad Peterson, senior analyst with Boston-based Aite Group. "It is a safe statement to say you can't make a living in payments just selling black boxes any more. That business is over with."
The payments business has become far more complex, to the point that even "the simplest of small merchants" have far more choices than in the past for card acceptance or mobile payment technology, Peterson added.
Global Payments' recent acquisition of Heartland Payment Systems provides a good example of how companies are seeking technology upgrades and offerings to better serve retail clients, said Brian Riley, principal executive advisor with CEB TowerGroup."There are so many things that are happening in payments that stronger relationships with retailers had to develop," Riley said.
Ongoing Challenge: e-Commerce Fraud
The topic of fraud migrating over to card-not-present transactions has been the dark underbelly of the EMV migration from the start.
It might be one area in which the U.S. benefits from being one of the last markets in the world to convert to chip cards at the point of sale. The U.S. payments industry was forewarned about putting more focus on e-commerce protection, rather than finding out about it by being an early adopter of chips at the POS.
Online fraud before and since the EMV liability shift has been more of a slow climb rather than an immediate spike, said Bill Zielke, chief marketing officer at e-commerce fraud protection provider Forter.
"I would say the journey is beginning, but retailers are getting ready for that and we are seeing a pickup in interest and activity of those looking at ways to increase fraud protection and prevention," Zielke said.
E-commerce security has long banged heads with consumer friction, as merchants do not want security measures that aggravate customers and lead to lost sales from abandoned orders, Zielke added.
"Retailers are thinking about how to eliminate friction, and we will be seeing more of that in the next year," Zielke said.
In the coming years, more e-commerce retailers will open their products to international markets, and will need technology to payment types they are not currently accepting, Zielke added.
Issuers and merchants confirm that criminals weren't waiting for the Oct. 1 liability shift at the point of sale to start attacking the card-not-present channels, Aite's Conroy said.
"They are all seeing CNP chargebacks steadily rising over the second half of this year," Conroy said. "So, even though we knew what was coming, the criminals continue to innovate more quickly, and CNP fraud is rising more quickly than many had anticipated."
The recent avalanche of data breaches are fueling the trend as account takeovers using compromised credentials, and stolen card fraud, are both painful right now, Conroy added.
The U.S. came into the EMV game with an e-commerce channel that was always "far more mature and advanced than in other countries," the migration forum's Vanderhoof said. "Online merchants in the U.S. are generally more sophisticated in their handling of payments and are more likely to use fraud prevention tools from third-party services providers than merchants who operate only physical stores," he added.
The full effect of the liability shift on merchant chargebacks and increased e-commerce fraud won't be known until early next year when a few months of tracking can reveal trends.
The move to EMV represented a massive change for the U.S. and a process "that just feels funny" because consumers were so used to mag-stripe for decades, TowerGroup's Riley said.
"No matter how easy it is to criticize EMV, it's definitely a step toward more digital involvement on the payment card, so that is good," Riley added. "There are still a lot of warts, but it's a step we never took before, so you can't criticize baby steps."