U.S. card-industry players may be overestimating certain technical barriers perceived to be holding the U.S. back from adopting the EMV smart card payment standard used around the world, smart card industry executives say.
No official movement is afoot to switch to EMV in the U.S., which is becoming increasingly Balkanized as the only major global region not moving to the more-secure chip-and-PIN technology. But a Visa Inc. executive is among experts who suggested this week that, though issuers, acquirers and merchants may be resisting the shift for a variety of reasons, EMV technology itself is not the biggest obstacle preventing the U.S. from adopting the standard.
Moreover, participants at a Jan. 26 Web seminar entitled “The Top 10 Reasons U.S. Should Consider EMV,” conducted by the Smart Card Alliance Mobile Payments Council, warned that as EMV becomes ubiquitous worldwide, countries stuck with the lower-tech magnetic stripe standard may begin to experience higher fraud rates and lost revenues from cardholders unable to use their U.S.-issued, non-EMV cards abroad.
One of the obstacles blocking EMV in the U.S. could be the perception among some industry players that heavier-duty, more-costly technology is needed to secure EMV transactions, which is not the case, Simon Hurry, a Visa senior business leader, said during the webinar.
In many parts of the world outside the U.S., more-complex and costlier EMV technology is needed to authorize transactions offline in certain regions where telecommunications is unreliable, Hurry explained. Instead of immediately authorizing a transaction online, heavier security layers are needed between the card reader and the chip to process transactions offline. Most EMV technology outside the U.S. supports such offline transactions.
In contrast, nearly every U.S. card transaction is authorized immediately, or “online,” because of the region’s fast, efficient telecommunications infrastructure, so no need exists to build in the heavier-duty offline authorization capability, Hurry said.
“The U.S. is pretty much an online-only environment, and every transaction goes online to the host system for authorization and, because of that, much of the complexity (of the offline EMV transaction authorization) could be dispensed with (for a U.S. EMV card standard). It could radically simplify things as well as lower costs,” Hurry said.
Randy Vanderhoof, executive director of the Smart Card Alliance, said in an interview that an “EMV light” approach designed for immediately authorizations likely would result in lower costs for chips containing less memory and also lower overall processing costs. “From a practical point of view, if U.S. issuers chose to do the online-only authorization model, it would be less costly, ... and we believe industry analysts haven’t really taken that into consideration when looking at the business model for implementing EMV in the U.S.” he said.
The smart card standard, named after its creators–Europay, MasterCard and Visa–was devised two decades ago to combat fraud when most transactions abroad were processed offline, Vanderhoof says. And while a growing percentage of all card transactions are conducted using immediate authorizations globally, in some countries about 50% of transactions are still handled offline because of unreliable telecommunication connections, according to the alliance’s data. Therefore, most EMV cards overseas are enabled for offline transaction authorizations.
Broader obstacles prevent the U.S. from adopting EMV, Vanderhoof says. The chief problem is a lack of shared incentives among issuers, processors and merchant acquirers, all of which operate separately, unlike in Europe where a single entity often controls all card functions. The investment merchants and issuers would need to make in new hardware, software and systems is likely to be costly, he acknowledges.
“In many countries outside the U.S., the company that invests in EMV reaps all the benefits, whereas in the U.S. not all industry participants investing in EMV would benefit equally,” Vanderhoof says.
But the incentives for adopting EMV are growing. In nearly every global market, reducing fraud is the primary driver for adopting EMV, Deborah Baxley, a management consultant with KeyPoint Consulting, said during the webinar. “It is almost impossible to counterfeit a chip card,” she said.
The loss rate on payment cards in the United Kingdom, the first country to fully implement EMV, declined from 18 basis points to 12 basis points between 2001 and 2008 as a result of the more-secure technology, Baxley said. A basis point is one-hundredth of a percentage point.
As more countries adopt EMV, card fraud is likely to migrate to non-EMV cards, which eventually could become a serious problem, Baxley says.
The global movement toward EMV is starting to affect U.S. travelers, who are experiencing rising problems using their lower-tech mag-stripe cards abroad.
Indeed, mag-stripe cards are destined to become “increasingly marginalized” in countries where EMV cards are standard, said Nick Holland, an Aite Group senior analyst. As a result, issuers should strongly consider making EMV chip cards available for U.S. cardholders traveling to those countries, he said.
Aite Group conducted an online survey of 1,019 U.S.-based international travelers and found that within the past four years a significant number have experienced problems using a credit, debit or ATM cards while traveling abroad, such as declined transactions. The spectrum of problems cardholders encountered using their cards overseas was broad. But 16% of respondents said their transactions were declined because a foreign payment device did not accept mag-stripe cards U.S. travelers typically carry, while 11% said a foreign payment device accepted only chip-based cards.
Some 74% of respondents whose transactions were denied because of incompatible card technology found the experience to be “extremely frustrating,” while 66% of that group said it is becoming more difficult to use U.S.-issued cards abroad, and 62% said the experience changed their card-use behavior in some way.
Forty-six percent of respondents had problems using their U.S.-issued payment card in Western Europe; other regions where U.S. cardholders’ transactions were declined included the Asia-Pacific region (44%), the Middle East (43%), Central Europe (42%), Africa (33%), Australia and New Zealand (29%), Latin America and the Caribbean (27%), Mexico (24%) and Canada (13%).
As a stopgap measure before the U.S. adopts EMV or another option emerges, U.S. card issuers should execute “targeted issuance” of EMV-compatible payment cards to frequent travelers, Visa’s Hurry recommends, noting issuers could enable such a card for use in conducting both PIN and signature transactions.
“With strong authorization controls (on special cards issued to frequent travelers), you could enable transactions that were previously declined,” Hurry says. “This is something issuers should consider for cardholders who travel frequently overseas.”
It is unclear whether or when the U.S. may adopt EMV, but pressures are mounting from various directions, Vanderhoof says. “We’re not saying moving to EMV in the U.S. would be easy, but there are pathways to doing this that are different than those other countries followed, and the technological barriers of entry are not as high as some think,” he says.
