Canada Moves to Embrace Chip

  Canada's debit network says it will have the infrastructure in place for its members to begin issuing chip-based debit cards by the end of 2006.
  Canadians' affection for debit soon will be put to the test. Interac, Canada's national debit network, says it will be ready for the country's first chip-based debit card transactions to take place by 2007. The network expects a full implementation of a chip-based debit program to be in place by as soon as 2010.
  Canadian credit cards also are moving to a chip-based format, but the move to convert the debit system to chip could be viewed as strange given the nation supports only PIN debit, which by its nature should be relatively secure. Nick Hames, vice president of Dayton, Ohio-based NCR Corp.'s Canadian financial solutions division, says the rise in card skimming over the past year has strengthened the business case for chip in Canada. Moreover, a recent study by the American Bankers Association found that fraud losses on a per-card basis are much lower in the U.S. than those in Canada for PIN-debit transactions.
  Chip cards are harder to counterfeit than are magnetic-stripe cards. The rollout of chip-based debit cards is expected to take at least four years, so debit acquirers in Canada will have a long time to convert their terminal base.
  "Starting in 2006, Canada will see a rollout of chip cards and chip-accepting terminals, with significant mass being achieved in 2010," says a spokesperson for Canadian acquirer Moneris Solutions, which is a processing partnership of Royal Bank of Canada and the Bank of Montreal.
  Canada's initiative follows a much shorter migration to chip-based debit and credit cards than is taking place in the United Kingdom, where banks set a deadline of Jan. 1, 2005. Since then, merchants failing to upgrade their POS terminals to chip technology are liable for card fraud in their stores. Previously, issuers were liable for most card-fraud losses.
  Canadian merchants probably will not have the incentives offered to their U.K. counterparts, says Douglas Beardshaw, president of the Devmark Inc. consultancy. But they also will not have the tight deadlines established in the U.K.
  Indeed, Interac thus far has not set any deadlines. "Interac has yet to formulate any policy on the issue of liability shift, incentives or subsidies. These are all to be discussed," says an Interac spokesperson. "We don't have any end date target, but we think our goal of the first chip transactions taking place in 2007 is realistic."
  The ATM base in Canada most likely will be the first to migrate to accepting chip-based debit cards. "We're well along a project of upgrading our ATMs, which will make them chip-capable," says a spokesperson for Toronto-based TD Bank.
  Canadian banks have in the past owned most of the ATMs in Canada, but there is a growing base of independent ATM owners in addition to the nonbank POS terminal operators. Unlike in the U.K., Canadian banks are unwilling to pay for the cost of migration for ATMs and POS terminals they do not own. So fraud liability could become the central point of debate in converting to a chip-based debit program, say some observers.
  "There should be a liability shift to ISOs and POS terminal owners so they are responsible for any losses if they do not upgrade their machines," says Eric Lemieux, vice president of personal banking at Montreal-based Desjardins. "Every section of the payments industry has to make its contribution to fighting fraud. Why should ATM and POS terminal operators not pay for upgrading to chip?"
  Many of the POS terminals and ATMs being deployed in Canada are capable of reading chip cards, says John Gould, an analyst at Needham, Mass.-based TowerGroup. Liability issues should not be as central for acceptance as in the U.K., he says.
  Rob Connelly, San Jose, Calif.-based VeriFone Inc.'s general manager, North American strategic accounts, agrees. "All our terminals sold into Canada support EMV and just need a software upgrade," he says. "We don't have a huge base of legacy terminals in Canada."