MasterCard Inc. is pushing merchants to upgrade their checkout systems to handle credit and debit cards that store information inside an embedded chip.
The technology, which adheres to card industry standards known as EMV, is considered to be more secure than magnetic-stripe cards because customer data is encrypted inside a chip, making it harder to hack into.
While a handful of U.S. banks and credit unions have begun issuing the cards here in the last two years, mostly to customers who travel abroad, retailers have held off on upgrading their payment terminals because of costs.
"The U.S. has become an island in waters that are surrounded by EMV," said Chris McWilton, president of U.S. markets for MasterCard. "We're the only major market in the world that hasn't adopted the EMV standard."
MasterCard competitor Visa Inc. last year announced a similar plan intended to spur adoption of the technology, which some analysts said would be slow to gain traction without agreement from competing card-processing networks.
"It's only effective if the other networks do the same," said Julie Conroy McNelley, a senior analyst with market research firm Aite Group LLC.
Merchants don't want to spend money on technology if the benefits and requirements differ among card companies, McNelley said.
MasterCard plans to shift liability starting in October 2015 to merchants who have not upgraded their checkout equipment to process transactions made with chip-based cards if a customer pays with such a card and fraud occurs, McWilton said. Banks currently pay for most card-fraud costs.
The company will also allow merchants to reduce some security-audit activities if they upgrade to certain EMV terminals. That relief would phase in beginning October 2013. However, they must still be in compliance with the security requirements.
MasterCard is urging banks that issue its cards to adopt the standard, and will hold them liable for some forms of card fraud if they have not issued chip-based cards to their customers, depending on whether a merchant has EMV terminals, McWilton said.
"Our thinking here is what we've got to do is ... get the infrastructure and the ecosystem for payments in the United States to eventually enable a better customer experience," McWilton said.
A move to EMV equipment by merchants could also advance mobile-payment technology, experts said. The terminals that handle chip-based cards are often compatible with systems that allow customers to tap and pay with a smartphone embedded with payment technology. Such systems are just now being rolled out or tested in the United States.
A handful of banks, including JPMorgan Chase & Co., Wells Fargo & Co. and U.S. Bancorp, as well as some credit unions have begun offering EMV cards to customers who travel abroad frequently.
Their motivation is to cut down on complaints from customers who frequently run into problems trying to use their magnetic-stripe cards overseas. Many overseas merchants insist on accepting chip-enabled cards, and some machines, like ticket kiosks, can't handle magnetic-stripe cards.
A wider scale deployment by U.S. banks isn't likely until merchants begin to upgrade, said Randy Vanderhoof, executive director of the Smart Card Alliance, an organization that promotes the technology.
"At that point it will make economic sense for the issuing banks in the U.S. to start converting their mag-stripe portfolios over to" chip-based cards, Vanderhoof said.
MasterCard's move follows initiatives announced last year by Visa, which is trying to boost merchant adoption by allowing certain retailers to avoid some annual security assessments while eventually shifting the liability for card fraud onto the shoulders of merchants who don't upgrade.
Visa's security incentive is set to kick in this October and its liability shift is scheduled for October 2015.
Both companies' plans require the banks that handle card transactions for retailers, known as merchant acquirers, also be equipped to handle chip-based cards by April 2013.
MasterCard took into consideration Visa's timeline when establishing its schedule, McWilton said, adding that merchants, banks and other parties said it was important to have a uniform roadmap to work toward.