Can Canadian Example Chip Away at EMV Resistance in U.S.?

In their wallets, millions of U.S. consumers carry payment cards with chips that can support a highly regarded security format used in much of the industrialized world — just not here.

And that, issuers say, is how it's going to stay, because the chips that make the EMV Integrated Circuit Card Specifications possible are contained in contactless cards, a once-promising payment system that has been unable to stimulate much demand from merchants and shoppers. In trying first to promote the use of contactless cards, and falling short, U.S. banks have effectively eliminated what could have become a stepping-stone to EMV in this country.

National payments systems can be re-engineered, however, payments executives and analysts say. Witness Canada, where issuers approached that restructuring the other way around. EMV's stronger security was an easy sell for banks and merchants, and, for that matter, is also helping banks develop a strong business case in turn for contactless payments.

"From our perspective in Canada, the first order was to get to EMV and then build upon that infrastructure," said Allen Wright, the vice president of product and service management at the Canadian payment network Interac Association. "It's more cost-effective, clearly."

Both the contactless and EMV technologies rely on a chip being built into the plastic card, and they both use the same chip. Those chips also require merchants to install new readers.

Interac has been testing a contactless payment system called Interac Flash in Toronto with debit cards issued by Bank of Nova Scotia and readers from Toronto-Dominion Bank's TD Merchant Services. Interac is planning a nationwide rollout in Canada next year, for contactless cards that also meet the EMV specifications.

Wright said that Canada introduced EMV first because it has a more obvious business case: security. Cardholders enter a PIN when they make purchases with EMV cards. The format is becoming widely used around the world, but not in the United States.

With contactless, the major selling point among consumers is a faster payment experience, but "unless you can get a level of critical mass … you're not really going to change the speed of that line" at the cash register, Wright said.

Gwenn Bezard, a research director at Aite Group LLC, agreed: if U.S. issuers ever anticipate offering cards with both contactless capabilities and EMV, they are laying the groundwork backwards.

"It is a lot easier to go from EMV to contactless" than to do it the other way around, Bezard said. Unlike contactless payments, "EMV is a mandate anyway … in many countries," he said.

There is some hope, Wright said. The U.S.'s most recent initiatives around contactless, such as a trial of bank-issued contactless cards in New York's public transportation system in place of a closed-loop fare card, may promote the format because closed systems like transit can provide an immediate critical mass.

"You need critical mass of usage, and what a transit system can help you create is a strong value proposition for the consumers and for that merchant … in a fairly ubiquitous way that will actually drive net new transactions," Wright said.

Canada is considering similar efforts to push contactless.

"We are absolutely looking at transit as a good market for our product," Wright said. Canadian issuers are also considering putting contactless at fast-food and other stores where it has already had some success converting cash transactions to debit.

"Where the debit users prefer to use their card is the focus of where we're deploying our efforts," he said.

Several years ago, contactless payments launched in the U.S. with a major marketing splash, but more recently those messages have faded, existing now primarily in specific markets and unique projects, such as New York's transit system.

And EMV has never had momentum in the U.S. Only one U.S. financial institution, United Nations Federal Credit Union, has announced plans to issue EMV cards to U.S. residents.

Beth Robertson, the director of payments research for Javelin Strategy and Research, said that contactless cards in the United States put the basic EMV technology in the hands of consumers, but don't offer much reason for banks to consider the security format. A better incentive, she said, is customer service, because it is becoming increasingly difficult for U.S. consumers to use their cards in countries using EMV.

"There is a value proposition associated with EMV and some problems that are occurring for U.S. cardholders when they travel," making them more difficult to use outside the country, she said.

"Contactless cards are struggling with making the value proposition clear," she said.

And though observers once said that contactless momentum could smooth the transition to EMV because they work from the same technology, today they say that momentum has largely vanished.

Bezard said that "over the past 10 years, on the one hand you had the push around the world — with the exception of the U.S. — for chip-and-PIN with the EMV standard and then another trend, totally separate, has been contactless to go after low-value payments."

Over time those efforts have begun to converge — with the exception, as Bezard said, of the U.S. "I just don't see contactless making a massive wave in the U.S." in its current form, he said. An Apple phone with a contactless chip could breathe new life into the space, he said, but the new version of the iPhone introduced in June did not include the technology.

And despite years of deployments and marketing, contactless is still seen as a technology for the future, Bezard said. Merchants that are investing in contactless readers now hope to future-proof their investments in new card readers.

"It becomes natural, when you make the chip-and-PIN investment, to say 'if we are going to do it, let's also do contactless, because that's something that can take us further down the road,' " Bezard said.