EMV is coming to the U.S.
Massive smartcard adoption will reduce fraud but require extensive replacement of cards and readers.
The EMV (Europay, MasterCard, and Visa) standard serves as the backbone for future payment technologies.
It’s used extensively worldwide, but it’s still relatively new in the U.S. That will all change in the next few years.
The conversion to EMV has begun, with momentum provided by merchant incentives and a required shift in fraud liability to merchants and issuers.
The migration to EMV promises to reduce the counterfeit card fraud that has become rampant with the current magnetic stripe technology. The migration will also let cardholders use their cards globally, and it will prepare the way for mobile contactless payments using near-field communication (NFC) technology.
EMV cards contain embedded microprocessors or chips that provide strong transaction security features and other capabilities not possible with traditional magnetic stripe cards.
About 44% of all payment cards and 72% of all payment terminals in circulation globally are based on EMV technology.
That translates to more than 1.5 billion EMV payment cards and nearly 22 million EMV terminals active worldwide.
These figures come from EMV Co., which is owned by American Express, MasterCard, JCB, and Visa. EMV Co. manages the EMV specifications.
Some areas of Europe are nearing 100% EMV adoption, significantly reducing counterfeit fraud. But card fraud losses here average nine cents per $100 in transactions, compared with 4.5 cents per $100 worldwide, according to The Nilson Report.
The weaknesses of the U.S. magnetic stripe system also create difficulties for U.S. travelers, who sometimes report overseas merchants no longer accept magnetic stripe card payments.
Visa and MasterCard are spurring EMV adoption by changing policies used to assign liability for counterfeit fraud losses.
As fraud continues to rise for magnetic stripe cards, credit unions that fail to adopt EMV could be held liable for a bigger share of the losses, says Ann Davidson, senior consultant for risk management at CUNA Mutual Group. This makes having an EMV adoption strategy critical.
“Credit unions must understand what EMV is, how it works, and how it’s going to affect payment transactions with their members. If they sit back and wait, they’re going to be left behind,” Davidson says.
EMV cards repel fraud in card-present transactions by using a dynamic verification value that changes with every transaction. That prevents thieves who steal card data from using the card at other terminals. Combining the chip with a PIN that’s verified online in “real time” provides an added layer of protection, Davidson says.
While only a handful of credit unions currently issue EMV cards, Davidson says all credit unions should contact their processors now to reserve a spot in the queue. Otherwise, they risk being so far down the line that EMV liability shift s could significantly increase those credit unions’ fraud losses.
“Even if your processor doesn’t offer it today, get your name on the list,” Davidson advises.
First U.S. issuer
United Nations Federal Credit Union (UNFCU), with $3.7 billion in assets, Long Island City, N.Y., became the first U.S. financial institution to issue EMV credit cards in 2010.
UNFCU serves members in more than 200 countries, with more than half of its 100,000 members based outside the U.S., including many in western European countries where magnetic stripe cards are rarely accepted.
Merrill Halpern, assistant vice president of card services, says UNFCU knew it needed EMV cards to meet the needs of its global membership.
While vendors appreciated the cachet of serving the credit union of the United Nations’ active and retired staff and their families, Halpern says they were initially unwilling to launch the service for a relatively small portfolio.
Digital security vendor Gemalto, along with UNFCU, put together a group of vendors to pioneer EMV. These vendors included Visa, First Data, and The Members Group.
UNFCU initially issued EMV cards to international travelers, who represent the smallest but most profitable segment of its 40,000-card portfolio. Since introducing an EMV portfolio, the inherent dollar amount of card fraud has decreased 30%, while the dollar value of purchases increased nearly 30%.
“The financial model shows there’s payback in terms of lower fraud losses and the opportunity for increased usage, but the payback period isn’t necessarily immediate,” Halpern says.
UNFCU, which continues to play an EMV advocacy role within the financial services industry, is gradually launching EMV for other credit card segments and will introduce EMV debit cards as resources allow.
Halpern says education is vital so cardholders understand how the EMV chip works, particularly if they lack the EMV exposure that comes with international travel.
“A good message for members is that this is a newer technology in the U.S., but it’s been in place overseas for a while,” Halpern says. “When a credit union rolls chip cards out for its members, this represents an investment in members’ financial well-being. It’s going to make their payments safer.”
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State Employees’ Credit Union (SECU), $25.3 billion in assets, Raleigh, N.C., began adopting EMV in early 2011 when it replaced traveler’s checks with a Cash Points Global chip card that relies on online PIN authorization.
SECU began converting its debit card portfolio in July 2011 at a rate of roughly 50,000 cards per week, with its portfolio of one million cards fully switched to EMV cards by December 2011.
Buying a large number of plastic cards at one time significantly reduced costs, says Leanne Phelps, senior vice president, card services.
All cards also carry a magnetic stripe because most local merchants can’t accept EMV yet.
Staff and member education was extensive—SECU used every communication channel to offer advance information. Still, the call center had a high number of calls from members who had questions when they received their new cards.
The conversion schedule was disrupted when members called to report EMV cards were being rejected at the point-of-sale (POS), typically at small shops throughout North Carolina.
SECU contacted merchants and learned their terminals were equipped to accept EMV cards but lacked soft ware to process the transactions.
Since terminals’ default-setting prefers EMV to magnetic stripe when both options are available, merchants received an “error” message instructing them to use the chip reader for the transaction. But that option was unavailable, since few processors are currently prepared to handle EMV.
Phelps says SECU would have preferred to use EMV to process transactions, the reality was that neither processors nor merchants were ready. Phelps says educating members and staff was essential, along with keeping the program as simple as possible.
She recommends, for example, color coding cards by portfolio segment, which allows call center staff to identify the segment experiencing problems by asking members about the color of their cards.
More issues ahead
Monthly EMV transactions hovered near 2,000 in 2012, but Phelps expects that number to rise dramatically after April 2013 when Visa and MasterCard deadlines direct processors to prepare for EMV.
“As more merchants come on board, there’s going to be another round of education required,” Phelps explains.
The Durbin Amendment offers another challenge because there’s no EMV solution currently available allowing merchants to designate how to route PIN-based transactions.
Phelps says offering a magnetic stripe has addressed Durbin’s dual-routing requirement so far, but this approach will be insufficient when EMV becomes the standard for processing transactions.
“One of the big dilemmas in the industry is the dual-routing requirement,” Phelps says. Durbin requirements apply to debit cards only.
Consumers’ anticipated adoption of mobile payments is expected to have a major impact on EMV. Some experts, including Davidson, advocate adding dual capabilities for NFC so EMV chip cards also can be used for contactless payments.
Others experts recommend waiting to learn whether consumers will prefer to use smartphones for mobile payments, rather than chip cards. Fie switch isn’t expected to eliminate chip cards, but it could affect usage.
“To get the penetration that’s needed, there must be some degree of convergence with mobile,” UNFCU’s Halpern says. UNFCU introduced mobile banking in 2012 and Halpern envisions a future market role for the integration of secure chip technology with mobile functionality.
Phelps says SECU plans to focus contactless payments on mobile devices and won’t add the capability to EMV cards.
Industry cost estimates of EMV cards vary, with some estimates as high as $10 per card (shipped to the consumer). Visa says that “increasing adoption in the U.S. and globally is bringing prices down to less than $1 per card.”
Experts also note that even EMV cards can be vulnerable to fraud. While EMV features make it more secure against counterfeit fraud in a chip-and-PIN environment, chip cards are just as vulnerable as magnetic stripe cards when used for card-not-present transactions, such as for online purchases.
The complexity of launching EMV cards makes the timing for introducing the cards to members all the more important. “It’s ever so critical that credit unions not sit back and wait,” Davidson says. “Get a plan in place and get it on your radar with a future delivery date.”