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Countdown to the EMV liability shift: Will the card brands blink?

Card brand lawyers are almost certainly sounding the alarm about potential lawsuits and legislation, but the finance folks are eager to shed billions in fraud costs.

September 29, 2015

by Daryl Cornell, CEO, Triton Systems

In what is likely a heated internal battle, the card brand lawyers are almost certainly sounding the alarm about a slew of potential lawsuits and possible federal legislation related to the shift. At the same time, the finance folks are eager to begin shedding billions in fraud costs beginning on Oct. 1.

Which side will emerge victorious? The answer will have sweeping ramifications for the overall timing of U.S. EMV adoption. Many merchants, ISOs and issuers have already placed their bets on the outcome of these deliberations, as evidenced by their actions (or inaction) in upgrading for EMV.

On the eve of the POS liability shift, the question is, "Who will be proven correct?"

Here are the options likely being discussed in Purchase and Foster City:

No one in the U.S. is ready for EMV — extend the deadlines!

According to the latest figures from Visa and Digital Transactions News, only 18 percent of Visa-branded credit, debit and prepaid cards contain an EMV chip. Yes, you did read that correctly — 18 percent.

Oh, but it gets better. Only 295,000 merchant locations are currently enabled for chip card acceptance. That's less than 4 percent of the 8 million card-accepting locations in the U.S.

You can almost hear the card brand lawyers, "Can we really risk alienating the vast majority of both our merchants and our issuers by passing on magnetic stripe fraud liability when so few are ready? If we do move forward, isn't Congress sure to react to the howls of protest from their constituents with potentially onerous legislation?"

The accountants counter, "By extending the deadlines, wouldn't we just be rewarding the procrastinators and penalizing the EMV adopters? What about the message we would send to ATM and gas pump operators about our 'line in the sand'?"

On and on it goes — credibility and risk versus goodwill and continued magnetic stripe fraud expense. Liability shift deadline extensions would seem to be the path of least resistance at this point.

Damn the torpedoes, full speed ahead!

"Look," argue the card brand accountants, "It's been more than three years since the initial liability shift dates were announced. The fact that merchants and issuers have largely waited to see if we are really serious about offloading fraud costs does not mean that we should continue to absorb our share of more than $4 billion (and growing) annual U.S. card fraud."

In response, the card brand lawyers are almost surely cautioning that the cost of litigation defense and a very public black eye may offset some or all of the liability shift savings.

"But," the accountants argue, "Won't a few highly publicized, six-figure chargebacks prove to be the impetus needed to get the ATM and gas pump operators upgrading for EMV?"

Again, more than just cost-benefit is at risk here. Enforcing the deadlines also involves the risks of driving merchants towards cash-only; stirring up the ire of Congress; or raising the dilemma, "What if our competitors extend their deadlines and we don't?"

While credibility is important to the card brands, it won't come here without cost.

Don't extend the deadlines but delay merchant (and issuer) chargebacks!

In this subtle compromise, the lawyers, concerned about the risk of merchant and issuer lawsuits, might be placated. Quietly, without fanfare or formal announcement, the card brands could simply refrain from charging back merchants and issuers for magnetic stripe card fraud for some period of time.

Year-end might be a logical compromise. It's only an additional 90-days and, by then, card issuers maintain that nearly 70 percent of all debit, credit and prepaid cards will contain an EMV chip. A reasonable delay in charging back merchants might also play well in Washington should Congress decide to poke its nose into the liability shift issue.

While the accounting folks won't be happy about continuing to eat mag stripe fraud costs for the remainder of 2015, such a compromise could prevent the potential upgrade disincentive for ATM and gas pump operators — until the world finds out that the POS deadline really was "soft."

The card brand business model is all about transactions. But, increasingly, it's also about containing fraud costs.

In rolling out a "liability shift" as a means of coercing merchants, processors, issuers and ISOs to upgrade for EMV, chargeback fallout has the potential to sweep away transactions along with some of those fraud costs.

As the U.S. counts down to chargeback liftoff, the question is, "Will they blink?"

This article has been republished from the Triton blog, atmAToM, with kind permission from Triton.

photo istock

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