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.
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- Identity Theft: What You Need to Know
- How Can You Tell If Your Identity Has Been Stolen?
- What Should I Do If I’m a Victim of Identity Theft?