Article

Enough with the finger-pointing. It's time for the US to refocus, reform and unite on EMV

It's easy to play a blame game with the card networks and denounce the US liability shift as an illegal scheme. But instead of continuing to finger-point, it might be time to consider more constructive options.

July 14, 2016

by Eric de Putter, Managing Partner and Co-founder, Payment Redesign Ltd.

Judging by a recent blog from Triton and Durbin’s letters to the card schemes, EMV in the U.S. is not doing great. In Europe there is surprise but also bemusement about the way American banks, card schemes, retailers and consumers deal with EMV migration.

What are the issues?

1. A liability shift followed by charge-backs

There are unforeseen consequences of the liability shift that create a larger business case for implementation. Industry insiders suggest that the number of charge-backs have multiplied by a factor of 10.

One reason why is that issuers charging back fallback transactions (in which a mag stripe card is used on a chip-enabled terminal) and take the word of their cardholders for granted. There is certainly fraud, and there is definitely abuse of the rules.

Some transactions are coded “chip capable” as the hardware is already in place, but issues with certification delay activation of software, which means that every EMV card transaction would be considered fallback. ATM operators are also feeling the impact since fraudulent cardholders and heavy-handed issuers don’t distinguish between POS terminals and ATMs.

2. Continuing use of signature

Continuing with signature is similar to building a huge barbwire fence around your house, then leaving the gate open for your car. Experience elsewhere has demonstrated that use of a PIN code actually shortens the transaction time — a bonus for multilane retailers for whom queuing means either less turnover or higher costs.

3. Reluctance to embrace change

Given the implementation issues, it is easy for critics to say that EMV does not work and argue that there is no business case. With this attitude, I doubt that the steam engine would have made it. The case for EMV can be qualified.

4. A rush to the courts

It is fair enough that no-one could see the Draconian impact of the liability shift, but a central EMV migration body with a proper mandate would allow for a constructive debate between the stakeholders rather than immediate escalation to the courts.

CMS Payments Intelligence, a consultancy specializing in retail payments, has published a convincing business case that the cost of counterfeiting continues to rise and is at such a level that the cost of chip cards and terminal upgrades is now lower than the cost of counterfeit fraud. Rather than “to EMV or not” the debate should center on “how can we make it work.”

EMV — the original objectives

Ironically, EMV is one of the few ways to reduce card fraud. Fraudsters can buy skimming kits or hack retail systems to steal — and then sell — data. EMV data can be copied but the unique transaction cryptograms cannot, making it harder for fraudsters to create counterfeit cards based on hacked data.

Not acting means turning a blind eye to criminal acts. The avalanche of charge-backs is partly caused by cardholders defrauding their bank (which then defrauds the retailer). There is no other option but to consider this as fraud.

A major increase in American drivers running red lights would be raised in legislatures; laws would be amended to allow faster prosecution and heftier fines, and cross-divisional law enforcement task forces would be appointed to catch perpetrators.

With EMV, cardholders and some banks are running red lights and penalizing the retailers but no clear action follows. A better definition of the liability shift, charge-back monitoring and meaningful prosecution of fraudsters could all help.

Time to play the blame game — or to refocus, reform and unite?

It is easy to finger-point at the card schemes and denounce the liability shift as an illegal scheme. But, instead of starting a blame game, it might be time to consider some of the following options:

1. Clarify charge-back rules

In other parts of the world, the card schemes have conditions for charge-backs, such as the requirement that the issuer carries the burden of proof for fraud. A fallback is exempted from charge-back unless the issuer can prove that these are of a fraudulent nature or that the acquirer is generating excessive fallback transactions.

A second element of rule changes might include issuer charge-back monitoring and caps on charge-backs per issuer to reduce the 90 percent of charge-backs made for entirely the wrong reasons. Issuers might not like this, but I am sure they do not want to be complicit in cardholder fraud.  

2. Adopt chip and PIN

In a scenario that allows both chip and PIN and chip and signature transactions, the same cardholders causing charge-backs can cite the lack of a PIN as the reason for a charge-back. There are some practical issues to consider in a switch to chip and PIN only: Cardholders might need a grace period; banks might want to allow a fallback to signature for cardholders who don't know — or can't remember — their PIN. This approach was successful in Europe.

Perhaps issuers could allow cardholders to use the ATM to make PIN changes so that cardholders with multiple cards can choose their own PIN. Adding a carrot to a stick-only approach might move the ATM industry more quickly to EMV.

Future liability shift dates

MasterCard — which has less market share than Visa — believes that the ATM industry should be ready for EMV a year earlier than rival Visa. However, ATM Industry Association data indicates that 50 percent of ATM deployers believe that 75 percent or more of their fleet will not be ready for the MasterCard liability shift.

If harmonizing the MasterCard liability shift date with the Visa date is not possible, the least MasterCard can do is to provide protection for ATM deployers against the overhead of fraudulent charge-backs.

Eric de Putter is co-founder and managing partner at Payment Redesign Ltd., a boutique consultancy in the payment industry with specialized expertise in associate partner selection and commercial strategy. He is also an executive advisor to Paymint AG, a German company that provides business and technical support for the entire payment value chain. De Putter has spent 20 years in the payments and cards industry and has previously worked at Evry ASA, VocaLink and Visa Europe.

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