How the U.S. chip card switch is on schedule to reinvigorate retail payments
Naysayers have been circling around the ongoing chip card migration in the United States with many negative op-ed articles. But predictions of EMV’s shortcomings are somewhat premature.
Any perceived lethargy in adoption from issuers or merchants is frankly to be expected at this stage. The United States may be the last G20 country to adopt chip cards, but migrations around the world all took five to 10 years to complete. Our country will be no different. Contrary to many industry misconceptions, the EMV migration remains very much on schedule.
The same but different
While the time to migrate the United States to chip cards is following a similar trajectory to all the other global implementations, there are some significant complexities that are unique. First, the scale of the rollout is on a different level than smaller European countries. Other implementations have consisted of fewer players and considerably fewer merchants and cardholders to be migrated.
A second important difference is that most other national chip card migrations have been officially mandated by local regulators. The United States, on the other hand, prefers a voluntary scheme where issuers and merchants are under no obligation to upgrade. This has led to a disparity between the large number of chip cards already in circulation and the relatively small number of merchants that can accept them. Most other national chip card implementations saw the opposite with merchant and consumer demand often outpacing the card issuers by two or three times.
The more rapid adoption by issuers is simply because the U.S. business case dictates it. The liability shift that came into effect in October of 2015 means that for a transaction where the cardholder has a chip card and the merchant cannot accept a chip card, the cost of fraudulent card transactions is now the responsibility of the merchant rather than the issuers. Consequently, issuers are speeding ahead as their fraud liability shrinks with every chip card that is delivered. Merchants, on the other hand, have been slower, resulting in a haphazard experience at the POS.
Another factor is that while the U.S. credit card market is largely homogenous with the rest of the world, the domestic debit market is much more complex and heavily regulated by authorities. This means much more work is required to apply the numerous debit processing rules.
Spreading the word
On the face of it, the number of enabled cards already in circulation in the United States is impressive with around 70 percent of debit and credit cards already with chips. However, the bigger issuers (who have all embraced chip cards) skew the figures. In reality, only about one-third of issuers have completed their chip card rollout. This is also true in the merchant realm, where most of the big chain stores have already installed the necessary POS terminals, while smaller retailers lag behind resulting in only about one-third of all merchants currently ready to accept chip cards.
With the U.S. issuer market in a good state, most of the noise and negativity is coming from merchants. The merchant lag is totally expected, of course, given their unpreparedness and the realization of what the fraud liability shift really entails. In the past, before chip cards, merchants never incurred consequences from fraud. But with the liability shift, merchants are waking up to it. Smaller merchants are now seeing fraud for the first time and chargebacks are becoming a big issue. This has made the implications clear for those not already EMV-compliant.
Education, or the lack of it, remains a significant factor in the uptake of EMV across the market. Unlike most other global EMV projects in which government agencies sometimes got involved, the U.S. card processors and issuers have done very little to introduce chip cards and champion the advantages for merchants and cardholders. An industry-wide education program and promotion would certainly help all the players, and speed up adoption and he nationwide rollout.
Cutting to the chase
The basic capability of EMV is to replace magnetic stripe card swipes with a chip card. However, expected progression of card technology has many issuers already looking toward the next phase, such as the advent of dual-interface cards: a chip-enabled EMV card with contactless payment capability built in. In fact, we are already seeing forward-thinking issuers seriously look at going to a dual interface card right off the bat. There are numerous pilot schemes up and running, and by late 2017 or early 2018, we expect to see significant numbers of institutions launching phase two.
A lot of the EMV chip and PIN card issues connected with the speed of the transaction and overall consumer convenience are solved by contactless capability – convenience is maximized by simple tap-and-go payments. In fact, in many sectors where speed and ease of use are critical – such as fuel retailing – retailers are looking to go directly to contactless.
Keep calm and carry on
We have completed year two of a five- to ten-year migration, and everything is on track. We cannot realistically expect a complete migration in year one. However, adoption rates are strong, and the advent of contactless payments enabled by a dual-interface card will likely spur further adoption of chip cards.
History is an excellent indicator of what is going to happen in the future and there is no reason to expect the United States will be any different from the rest of the world.