ISOs 'Wait And See' On U.S. EMV

In the financial services world, two years can seem like an eternity. As a result, many ISOs are taking a wait-and-see-approach when it comes to switching to EMV.

EMV chip cards are commonly used outside the U.S. instead of magnetic stripe cards and have been shown to decrease fraud committed with counterfeit, lost and stolen cards. The major card brands have all announced plans to move to an EMV-based payments system in the U.S., with this past spring marking an important deadline for payment processors. But it isn’t until October 2015 when the stakes for ISOs really get high. After that point, acquirers or merchants whose systems aren’t aligned with the new standards will be forced to eat the cost of a higher number of fraudulent transactions.

At this point, though, the transition remains a work in progress, with only a small number of ISOs actively gearing up for EMV and the rest sitting on the sidelines until issues beyond their control are ironed out.

“You’re either doing a lot or you’re doing nothing these days,” says Jeff Rosenblatt, president of EVO Payments International, an ISO in Melville, N.Y., which is one of the few acquirers taking a proactive approach to the transition.

The industry-wide switch to the EMV standard means that most merchants will be forced to upgrade their terminals to be EMV-capable. Most new terminals produced today have that capability, but the replacement process remains in the early stages.

Some 43% of acquirers have already standardized EMV/NFC-ready equipment into their product offerings, removing non-ready devices from their distribution channels, according to a July report from Aite Group, a Boston-based research and consulting firm. Another 24% plan to complete the standardization effort this year, while 33% do not yet have plans to standardize.

Yet, despite having the equipment ready, acquirers have not yet begun to make significant sales pushes to replace older terminals, Aite’s report shows.

A sticking point is that even if every merchant in the U.S. had EMV-capable terminals today, the industry is still a ways away from being able to process chip card transactions. Indeed, many loose ends need to be tied up before that can happen.

For example, while many devices on the market today are EMV-capable, the software to make chip card transactions happen is still being developed. What’s more, certain standards with respect to how the process will work still have to be agreed upon by the card brands.

In addition, issuers aren’t yet making EMV chip cards on a grand scale in the U.S. Though chip production costs have come down, issuers are gearing those cards only toward international travelers whose ability to do business overseas could be interrupted without them.

Another big challenge is how to switch to EMV while complying with the Durbin amendment. Indeed, infighting is still raging among the card brands about how to manage debit transactions in an EMV world.

Meanwhile, a judge has ruled that the Federal Reserve capped debit fees too high.

“We’re still largely in this chicken-and-egg stage,” says David Abouchar, senior director of product management for Atlanta-based ControlScan, a provider of PCI compliance and security solutions for small merchants and ISOs. “There’s a lot of uncertainty right now.”

As a result of all those loose ends, some ISOs don’t feel any pressure to start the EMV ball rolling with merchants.

Barry Sloane, president and chief executive of Newtek Business Services Inc., a super ISO in Manhattan, says he doesn’t see the point of rolling out new terminals to merchants today if they can’t actually be used to process EMV transactions.

“At this point, there’s no compelling reason to get a new EMV-compliant terminal because the whole solution isn’t there,” says Sloane.

He likens the situation to a home security system that with an alarm on the front door, but none on the windows. “If you’re EMV-compliant on one out of four aspects, that doesn’t work.” Sloane says that he expects Newtek will be able to offer a more complete solution to merchants in the coming months.

Even if the solution is not complete, industry observers believe ISOs need to start gearing up for the transition—at least internally. They can do it by training staff, reading up on the transition and getting as much information as possible. It’s also not too early to get a good handle on the equipment their merchants are using and what else they’ll need to comply with EMV.