Home > Credit Cards > Why Are Retailers Taking So Long to Upgrade Credit Card Readers?

Comments 2 Comments

Like a teacher dealing with a procrastinating student, it is tempting after all the delays with the implementation of new chip-enabled credit cards to say, “That’s it, no more extensions!” And that’s what it sounds like when the financial industry criticizes merchants for requesting yet another extension for them to convert to new-fangled EMV chip cards. But let’s keep things in perspective: Merchants are facing a serious expense, retrofitting millions of point-of-sale terminals. It’s no surprise they are behind. But behind what?

The October deadline set by the credit card associations isn’t about security. It’s about a liability shift. If it were really about stopping fraud, there’d be a whole lot more happening than forcing merchants to spend millions on chip card readers or face increased liability for credit card fraud.

To get you up to speed, recall that the U.S. banking system is finally on the verge of switching from old-fashioned magnetic-stripe credit cards to so-called EMV cards that come with security-enhancing computer chips. U.K. banks made this switch almost 10 years ago. Here in the U.S., it’s been stalled by a chicken-and-egg problem: Why should banks go to the expense of making new cards if stores don’t have the machines needed to read them; and why should stores spend the money on readers when consumers don’t have cards with chips?

Kicking the Can Down the Road?

The credit card associations have set about breaking this logjam by imposing a liability shift this October. Merchants who don’t have EMV card readers by then the will foot the bill for fraud conducted with magnetic stripe cards. That kind of liability shift is a huge deal for merchants — it could have a $10 billion price tag, according to PaymentsSource.com — and now that the deadline is almost upon is, some are begging for mercy.

In April, a retail organization called The Food Marketing Institute (FMI) — which represents thousands of retail food stores and pharmacies — asked for a delay of the shift into next year. Stores just aren’t ready, the group claims, according to the Wall Street Journal. There’s a backlog and delay of card-reading terminal orders; and no one wants confusion over new payment methods to mess up the holiday season. Wait till 2016, the organization has requested.

No way, responded the banking industry this week, in the form of an op-ed written by former Minnesota Governor Tim Pawlenty, who now heads the Financial Services Roundtable industry group.

“American consumers deserve to be protected with strong security measures and technologies, ensuring they remain confident in the payments system,” he wrote. “Further delay only gives cyber criminals more opportunity to victimize both American consumers and companies.”

Pawlenty has a point, in that herding all the cats involved in the payment chain is a Herculean task that requires several organizations to make a leap forward collectively. One delay leads to another, and another, and so on. And merchants did have four years to prepare for this day.

But the switch to EMV never really took on the seriousness it has today — and it may have never occurred at all — until Target was hacked at the end of 2013. Only then did merchants and banks really commit to the change. So it’s a bit unfair to suggest stores have been twiddling their thumbs for four years.

What’s Still Missing

Then there’s the pot-kettle element. Two things will conspire to make October 2015 not really a noteworthy date in the history of credit card fraud fighting after all.

First: America’s banking system is not migrating to the safer “chip and PIN” system that Europe favors, which requires consumers to enter a numeric code at checkout. Here, we will implement chip and signature. However, signatures are essentially meaningless and provide no fraud protection.

This is a half-measure. Yes, requiring chip cards will basically end card-cloning, because criminals can’t really manufacture fake chip credit cards the way they make fake magnetic stripe cards today. But criminals will still be able to physically steal the cards and use them. The strong two-factor “something you have and something you know” security will be downgraded simply to “something you have” security here. Meanwhile, chip cards will still have magnetic stripes that can be used anywhere those are still accepted, which will be many places. For example, gas stations have been granted an exception until 2017, because the expense of breaking concrete and changing out pump card readers is prohibitive. Given the high degree of fraud at gas stations, old-fashioned credit card fraud isn’t really going anywhere any time soon. The chip and signature decision led Walmart’s Mike Cook, assistant treasurer and a senior vice president, to call the switch “a joke.”

Second: The bigger issue is card-not-present fraud – mostly online fraud. Criminals will still be able to take a stolen account number and use it to buy things online as they do today. No difference. The card associations are hard at work on implementing a new system for online purchases that employs tokens, which would obscure actual account numbers. Tokens help the shift to EMV make sense. Without them, criminals just refocus their attacks, which is what happened in the U.K. after it switched to chip cards. Here’s the data from a report published earlier this year by Tristan Hugo-Webb, who is Associate Director of the Global Payments Advisory Service for Mercator: Counterfeit card fraud shrunk — from 27% of all fraud in 2003 to 13% in 2013. But card-not-present fraud, which includes online and telephone sales, climbed from 29% of fraud in 2003 to 67% in 2013.

While token technology is slowly making its way into the marketplace, chiefly through mobile payments, it is nowhere near the ubiquity required to end old-fashioned online credit card fraud.

So what’s the hurry? Yes, it’s good to move forward, and yes, merchants need to be nudged forward. But more carrot and less stick might be a wise approach. American Express is offering merchants $100 to upgrade to EMV. That’s nice, but the total price tag is estimated at $2.6 billion. Target alone is reportedly spending $100 million; even a tiny shop might pay $2,000.

It seems reasonable to give them a few more months before dropping the hammer. Hey, consider that more time to implement tokens.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its affiliates.

More on Identity Theft:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • docroc

    My experience with this so far as an end-user has been: I got my first chip-enabled card around May of this year. I found that most merchants I visit already have the card readers, but almost none (except Walmart) have the terminals enabled to accept the chip, so I have to swipe my card at those places.

    Most noteably, this includes our local TG Max (which doesn’t even have chip-enabled terminals) and Target (where they have them but they don’t work) and Krogers (the largest grocer in the USA) as well as Menards home stores, which only got new terminals recently, but they don’t yet accept the chips.

    Meanwhile, my partner and I spent a week in England earlier this month, where restaurants bring a WIFI CC terminal to your table to take your payment. In Europe (which includes the UK, so far anyway) the cards also have a PIN, which the uer types into the terminal whenever the card is used. Between the chip and the PIN, it’s pretty hard to commit fraud with one of these cards. These terminals accept the US cards, but you have to sign the receipt in plce of putting in a PIN.

    I sent email queries to both Krogers and TJMax and got polite, but vague responses, none of which promised anything about an implementation date. As a technical person, I find this pretty sloppy — once you’ve spent the money for the hardware, the software is pretty off-the-shelf; I absolutley do not belive that retailers have to rework their entire POS systems (on an individual basis) to support the change. And, at the current glacial speed of adoption, I don’t see October as realistic.

    BTW, merchants have always taken the hit for fraud, if that fraud occurred at their end of the transaction. In other words, if a crook steals a card and uses it to buy something in the store or on the phone or by internet, even though the processor authroizes and captures the transaction, once the real owner of the card makes a complaint, the transaction is charged back against the merchant, who is stuck with no merchandise and no money.

  • docroc

    PS Another large, well-known credit card company just sent me a renewal card and it doesn’t even have a chip!

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team