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EMV upgrade: U.S. merchants playing catch-up

The EMV upgrade race in the U.S.  is well underway but, worryingly, many merchants have been left in the starting blocks.

EMV upgrade

All stakeholders in the card payment processing ecosystem have until October 1, 2015, to meet the requirements issued by the EMVCo to guard against card-present fraud. With five months left to this deadline some 1.1 billion EMV-enabled cards still need to issued and 7.2 million terminals need to be upgraded. As of April 2015 a total of 120 million EMV-enabled cards were in circulation in the U.S., or just 10% of all U.S. payment cards (a total of 1.2 billion).

At the turn of the year there were 3.4 billion EMV payment cards in circulation worldwide. Tac Watanabe, the current EMVCo Executive Committee Chair, was quoted by Finextra as being pleased with the “healthy” global rollout of EMV – having viewed the Q4 2014 regional figures.

“With an additional 1 billion EMV chip cards issued in 2014 and cumulative transaction volumes climbing in every region last year, it is clear from the data that the global rollout of EMV chip technology is progressing at a healthy pace. The EMV Specifications delivered by EMVCo enable globally interoperable chip payments, so their growth in adoption is fundamental to the development of a more secure international payments industry. It is great to see that we are moving closer to that end goal.”

At the time that this Q4 2014 information was released the U.S. was just nine months from the fraud liability shift mandated by EMVCo. This fraud liability shift requires all stakeholders in the card payment process to upgrade to EMV specifications so as to improve card-present security. Again, as of April 2015, just 10% (or 800,000) of the 8 million POS terminals in the U.S. were EMV-enabled.

Just half of POS terminals ready by end of 2015

U.S. card issuers believe that the migration to EMV chip-enabled cards will be nearly complete by 2017. However, less than half of terminals (47%) will be EMV-ready by the end of 2015, meaning that the majority of U.S. merchants will not meet the requirements of this fraud liability shift.

In March 2014 a cross-industry group named the Payments Security Task Force was launched and it has provided some insight into the current state of the card-present landscape: “Eight financial institutions, representing approximately 50 percent of the total U.S. payment card volume, estimate that 63 percent of their credit and debit cards will contain EMV chips by the end of this year, expanding to 98 percent by the end of 2017.”

The Payments Security Task Force is focused on driving executive level discussion that will enhance payment system security. The task force have also released a very interesting white paper (recommended reading) titled: ‘U.S. Payments Security Evolution and Strategic Road Map’. One key line in this white paper is this: “The size of the U.S. market, however, suggests that at least 3-5 years will be needed to reach full maturity of chip card acceptance.”

This, once again, illustrates the challenges facing U.S. merchants as they engage in the EMV upgrade process. A process where the U.S. lags significantly behind the rest of the world.

This white paper also succinctly sums up what will happen once the fraud liability shift deadline passes on October 1, 2015: “Currently, issuers typically bear the liability for counterfeit fraud in card-present POS and ATM transactions. Once the liability shifts take place, if counterfeit fraud occurs on a contact chip-capable card and the merchant is not contact chip-card capable, the acquirer will be held liable for the transaction. Domestic and cross-border transactions will be included in the shift, while card-not-present transactions will not be included.”

EMV adoption worldwide

EMV chip card adoption rates had increased in every region worldwide by the end of 2014. However, the levels of adoption across the globe vary significantly.

In Europe Zone 1 (most EU countries plus Norway, Switzerland, and Turkey), 83.5% of cards are EMV chip-enabled. This is no surprise as many countries in this region were one of the early EMV adopters. In stark contrast U.S. adoption rates are running at just 7.3%. This figure will, of course, rise substantially in the coming years especially since EMVCo issued the fraud liability mandate with a deadline of October 1, 2015.

In the calendar year of 2014 just 0.12% of U.S. card-present transactions were EMV, as opposed to 96.6% for similar transactions in Europe Zone 1. In the period July 2013 to June 2014 just 0.03% of card-present transactions in the U.S. were via EMV-enabled cards.

EMV upgrade
The global rollout of EMV-enabled cards is continuing at an impressive pace but, for 2015 and beyond, all eyes are on the U.S. and Asia.

Asia, though, is a step ahead of the States in this respect with some 27% of card-present transactions carried out with EMV-enabled cards in 2014. We’ll have more on Asia’s EMV outlook in a later blog post.

First, let’s rewind: why does the U.S. need a fraud liability shift?

It’s all about the cost of fraud in the U.S. A LexisNexis report found that in 2013 U.S. merchants lost, on average, 0.68% of revenue — up by one third (33%) from 2012. In 2013 alone payment card fraud cost stakeholders in this ecosystem $11 billion.

As the world accelerated the adoption of EMV-enabled – and more secure – cards so card-present fraud migrated to more vulnerable targets. Those targets were – and continue to be – U.S. POS terminals. In addition to these fraud losses, U.S. merchants incurred more costs. Each dollar of fraud cost them $3.08 in 2013, compared to $2.79 in 2012.

Merchants are now in a very difficult space, and here at Aviso we understand the conundrum facing them. These rising costs must now be weighed up against the cost of upgrading an entire POS system so as to be EMV-enabled.

Nick Holland, Head of Payments at Javelin Strategy & Research, summed up the dilemma recently when quoted in a press release heralding the launch of an American Express campaign to help small merchants fight payment fraud. Mr Holland stated that: “The Achilles heel for EMV merchant adoption will be small and micro merchants that are not only unprepared for EMV, but even unaware of the fraud-liability shift in the U.S. this year. The majority of small merchants lack the financial resources and expertise to make the transition to EMV.”

So, what to do?

EMV upgrade: how Aviso helps

Well, that’s where our expertise comes in – or more specifically our EMV Wrapper.

Upgrading and meeting the requirements of the EMVCo upgrade requirements is a challenging task for all involved in the card payments ecosystem.

In a questionnaire during our October 2014 webinar on accelerating EMV compliance, we found that only 25% of participants were highly confident of achieving compliance while the rest 75% where either relatively less confident or not confident at all of meeting the deadline.

During this Aviso webinar our Head of Sales, Peter Bove, spoke about how change introduces cost and risk. Peter posed the questions: can risk be controlled, and can those in the card payments ecosystem reduce time costs so as to become compliant?

The answer – on the double – is yes.

And that is why we have developed the EMV Wrapper.

It surrounds the existing payment system and handles the complexity of EMV.

This great product provides EMV compliance without changes to existing applications, significantly reducing our customers’ migration risk. It can sit anywhere in the payment stream to manage EMV compliance for our customers be they merchants, issuers, and/or acquirers.

Our EMV Wrapper achieves this EMV migration without wholesale change to a customer’s infrastructure. Crucially, it is cost-effective, quick, and simple to integrate.

Make no mistake we also have a deep understanding of how important it is for merchants to show that their systems safely secure their own customers’ payment card data.

In fusing an existing system with the EMV Wrapper means a merchant does not have to perform heart-replacement surgery. Think of its use as a minor bypass procedure: there’s less pain, less risk, lower costs, and – crucially – less time lost doing business.

There is still time to do something about meeting this October 1 fraud liability shift. Don’t forget that there are quite a few organisations in a similar position; be it issuing banks or retailers.

As EMV migration expert David Cole states in our webinar it’s not about rushing what is a key decision for a merchant’s future business direction:

“Do things when it makes sense to do so. Don’t do it all in one go. Card schemes will say that you have to do everything. I don’t agree. Do what makes sense to you. A migration needs to be a very well controlled and well laid out plan and it needs to take time. I know there are mandates in the U.S., if you are moving you will be left alone by the card schemes. Understand the priorities within your own organisation. Plan and do it properly.”

A key element to your EMV upgrade is taken care of by our EMV Wrapper – trust it.

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For more information on our products and services contact us at info@aviso.io, or follow us on Twitter and LinkedIn.

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