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Why Is the U.S. Taking So Long to Migrate to Chip Cards?

Editor at Large

A month has passed since the deadline by which the U.S. was supposed to adopt credit and debit cards with computer chips on them — a deadline everybody's known since 2011.

Many banks and retailers not only missed the Oct. 1 date without breaking a sweat, they show little sense of urgency about getting the new chip cards in consumers' hands and making them usable in stores and restaurants.

The so-called liability shift, in which merchants that can't accept chip-enabled debit and credit cards will have to eat the cost of fraud on such cards, was expected to kick the industry into action. (These cards contain an integrated circuit that stores payment information according to a specification set by Europay, MasterCard and Visa. Hence they're often called EMV cards. The silvery thing that looks a little like a computer chip on the face of the card is not the chip itself, but a protective overlay. Chips are much harder to duplicate and compromise than magnetic stripes.)

Yet today, 46% of Americans have not yet received chip cards (according to MasterCard data) and only 41% of merchants have installed the equipment and software they need to accept them (according to a survey conducted by TD Bank). As the industry drags its feet, fraudsters have already begun phishing scams that take advantage of the general confusion over EMV cards, and other types of card-related fraud are expected to increase.

Many factors have combined to slow progress: There's been a chicken-and-egg effect — card issuers didn't want to get cards out in the marketplace too early to customers who had no place to use them. Retailers feared that if they train their clerks on the new terminals, the training would quickly become stale without practice. Some smaller card issuers have preferred to let others be the first to deal with customers' questions and complaints about the new cards. And some smaller merchants have simply refused to lay out the money required to upgrade their payment terminals to accept the new cards.

"If you think about the size of the infrastructure in the U.S. …there's a lot of different players in the ecosystem and it's complicated," said Julie Pukas, head of U.S. bank card and merchant services at TD Bank. "We're talking about the biggest payment network in the world, so everything is magnified. It was just a bigger process than people anticipated."

There's some movement toward EMV adoption. At the end of October, 34% of MasterCard-branded credit and debit cards and 48% of MasterCard credit cards contained EMV chips.

In a survey MasterCard conducted in October, 54% of consumers said they had at least one chip card in their wallet. About 30% also reported that they use the chip card more often than other cards in their wallet, according to Carolyn Balfany, a senior vice president at MasterCard.

The Payments Security Task Force, an industry group, projects 60% of all cards will be chip-enabled by the end of the year, 98% by the end of 2017.

Still, you'd think those numbers would be closer to 100% by now.

"You see consumer sentiment and consumer preference for a chip-enabled product," Balfany said. "That suggests there's a competitive imperative for issuers to be putting chip cards in consumers' hands."

In September, 457,000 U.S. merchant locations were chip-enabled, according to MasterCard data. In October that number rose to 676,000, about 49% growth in a month.

Obstacles Remain

One challenge for debit card issuers has been compliance with the Durbin Amendment to the Dodd-Frank Act. This requires merchant acquirers to provide merchants a choice of networks for routing debit card transactions, and mandates that all debit cards support at least two unaffiliated networks. To handle the routing requirements, the card networks had to agree on a common application identifier (a string of characters that identifies the network and the type of card).

"That took time to work out and it was met with hesitation," said Balfany. "It's a whole new process … that's not been done in any other market, so it was net-new and, probably rightfully, some were cautious about what that would look like in execution."

This Durbin effect is wearing off and by January, Balfany expects to see equal numbers of credit and debit cards being reissued with embedded chips.

Some smaller card issuers made a strategic decision to not be part of the first wave — to let their customers learn about the cards from others first, said Randy Vanderhoof, director of the EMV Migration Forum, another industry group.

"The fear is that the customer support phone lines of those small issuers would be flooded with customers who didn't know what the chip card was or how it worked or why they were getting one," Vanderhoof said. "It would fall on that bank to be the primary source for customer education. Some financial institutions may have chosen to let the big retailers and big banks spend the dollars to do that level of education. Then they'd come in after that consumer has become more educated and it would be less of a strain on their support system to service those customers."




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