The promise of EMV is a borderless credit and debit card payment system that stops fraud early in its tracks at point of sale. Why then has the U.S. been so reticent to migrating to EMV? Perhaps it is due to the fact that, as with most promises, the devil is in the details.
In the U.S., the relationships and roles of card acquirers, issuers, networks and merchants is substantially different and, in some cases, more complex than much of the rest of the world. In many countries outside of the U.S., major banks typically do both card issuing and acquiring. Whereas in the U.S., a number of very large banks operate large portfolios of card customers whom they issue cards to; however, they do very little on the acquiring side, so there is a "distance" between the issuing and the acquiring businesses. Since both sides (issuing and acquiring) will be affected by EMV, both sides need to make investments. As there is little, if any, coordination between the two sides as to how those investments will get made and who foots the bill, it results in a stalemate in terms of adopting new payment technologies.
Javelin Strategy & Research estimates the basic cost of deployment for EMV in the U.S. at $8.6 billion, broken down as follows: POS terminal deployment estimated at $6.75 billion, with merchants bearing the brunt; card issuance estimated at $1.4 billion, with card issuers bearing most of the burden; retrofitting or replacing bank-owned ATMs estimated at $500 million, with financial institutions bearing the majority of the cost.
The three primary reasons the U.S. has not adopted EMV to date are: First, unlike in other regions, the payment networks have not enforced it; second, the U.S. financial market dynamics are substantially different; and third, U.S. financial institutions have not yet found a substantial economic value in moving to EMV.
Because the U.S. card system is different and more complex than much of the rest of the world, so is the issue of who bears and/or shares the cost of EMV implementation. Banks are reticent to take on an unfair share of EMV deployment costs, meanwhile merchant acquirers will seek to push the expense on to the merchants who will, understandably push back, as they will also be bearing the cost of implementation.
Also, while fraud and security is at the top of the agenda of every financial institution, the impact of international and POS credit card fraud is not of such a size or trend to cause U.S. financial institutions to re-tool their entire card base. It presently costs a fraction of the price to issue a piece of non-EMV enabled plastic to a customer versus the cost to issue an EMV-enabled plastic. To re-tool from magnetic stripe to a chip-based card base would involve huge cost and does not presently have the quantitative value or business case to support it. So, the issuers are willing to accept and bear the fraud that could be potentially circumvented by EMV.
Fraud in the U.S. is no less substantial than in other countries. It is the focus and targets by fraudsters that is different. In the U.S. the biggest issue is in data breaches and data security, which is why financial institutions, particularly on the acquiring side, have been focused on PCI compliance and on making investments to secure the data they store to process payments.
Much of the innovation and advances around protecting against attacks such as "man in the middle" has come from U.S.-focused software and hardware development. This will pay dividends as NFC and wireless credit card payment grows in adoption. Financial institutions will find themselves ahead of fraudsters looking to attack mobile payment devices by intercepting information as it gets transmitted wirelessly through the airwaves, or infecting smart phones with worms and malware designed to snatch financial data. Innovation in this area will, to a certain extent, future-proof the next wave of credit card payments.
While wholesale migration to EMV is unlikely, what is likely and happening now in embryonic form is the deployment of EMV-like niche applications in areas such as transportation, quick service restaurants and retail; live events and entertainment; and specialist international cards for traveling, "high worth" clients. The emergence of NFC (Near Field Communications) technology, combined with the mainstream adoption of smart mobile devices, has the potential to set the ball in motion to change consumer expectation and demand for how they interact and undertake financial transactions with their retail world and lifestyle brands. The beginning of this potential new wave of emerging payments will be led by advances in applications brought about by contactless cards. Environments that deal with high volumes of customers such as mass transit, quick service restaurants, and live entertainment will see the first deployment of contactless NFC payment cards.
While embryonic, these early stepping stones to future technologies are centered on NFC and the deployment of contactless cards. These contactless and mobile payments will likely create a disrupting force and drive evolution toward "EMV version 2.0." The U.S. will be part of this evolution, organically. So, perhaps the question of why the US has not adopted EMV is the right question. Perhaps the question should be what will the next EMV wave look like?
Jim Schlegel is marketing manager at ACI Worldwide.