Running up the white flag after threatened lawsuits, fines and other financial losses stemming from the massive November hack, Target’s CFO, John Mulligan, told the Senate Judiciary Committee in recent testimony that all proprietary REDcards and all Target store card readers will be equipped with chip-enabled technology by the first quarter of 2015, six months earlier than initially planned.
Consumers may be issuing a collective sigh of relief, but for the nation’s retailers, credit card payment merchants, card issuers, and merchant banks, a whole new can of worms has been opened. And though it may make shopping more secure, it’s going to affect the consumer’s pocketbook.
When you say Europay MasterCard/Visa or EMV, the phrase pokes rather indelicately into the craw of major retailers in the U.S. for one gigantic reason: the time and cost required to put the system into place. What will full implementation of EMV in America look like? Fifteen million point-of-sale devices, three hundred and sixty thousand automated teller machines, over one billion credit cards, and five hundred and twenty million debit cards will have to be replaced. The estimated total cost for all this hovers somewhere around $8.75 billion.
To fearful consumers, $9 billion may seem like a modest cost to implement the new anti-fraud technology, but here’s the rub. Buried in all the hype around the Target hack is a very subtle but extremely impactive move by the credit card companies called the ‘liability shift.’ When the liability shift happens if there is an incidence of card fraud, whichever party has the lesser technology will bear the liability. What that means is if a merchant is still using the old system, they can still run a transaction with a swipe and a signature, but they will be liable for any fraudulent transactions if the customer has a chip card. And the same goes the other way – if the merchant has a new terminal, but the bank hasn’t issued a chip and PIN card to the customer, the bank would be liable.
The key point of a liability shift is not that it is stealthily designed to shift liability to the weakest or least timely players. No, according to the credit card companies the intended result is to create coordination in compliance, so you have issuers and merchants all arriving at the desired migration point at exactly the same time. Uh-huh.
Conspiracy theories aside, the liability shift assumes that every merchant in the U.S. will have a new chip and pin POS machine in place by, say, October 30th, 2015. And the other assumption is that on that very same day, every cardholder in America is going to receive his or her brand-spanking new C&P enabled card in the mail. If you have ever tried to navigate your way through a mid-sized company’s phone system, you know without doubt that coordinating this transition is not going to happen like they prophesy. Here’s why.
November 1, 2015, a cardholder with a swipe card comes into a store with a POS that can’t read it anymore. Does the consumer get turned away? If the cardholder has a chip and pin card, but the merchant doesn’t have his C&P POS terminal yet, what happens to the sale? In order to handle the transition, will there have to be transition cards with swipe and C&P capabilities? Not a good idea, because that negates the security. On the other side, will a merchant have hardware that reads both kinds of cards, (and not just chip and signature EMV but true chip and PIN)? If so, who’s making it? And now Target has thrown a monkey wrench into the works by promising to be compliant six months before everyone else. Does that mean that the rest of America’s retailers need to jump into high gear so they can be ready at the same time as Target? And if they do, have they even started to get on track for a transition that’s now little more than one year away? And one more thing: who’s paying for all this innovation? Ultimately, it is certainly not the banks or the merchants.
My point is this: before the Target hack nobody was talking EMV, at least not openly. Now all the bloggers are writing about EMV as though it’s a done deal, but it’s not. Everyone is not going to arrive at EMV changeover day at the same time, I guarantee it. And in considering the possible consequences of a transition that doesn’t work (see Obamacare Website), only one word comes to mind: Chaos.
Oh, and by the way – expect your cardholder fees to rise significantly even before the transition happens.
EMV Implementation Means Big Changes… – ©2014 Money Movers, Inc.