Chip cards and EMV technology have received a lot of attention in payments news this year. Payment processing companies and POS providers have been pushing their merchants to upgrade to EMV terminals in response to the liability shift for in-store chip card transactions implemented in October, 2015. But many merchants are still unclear about what the liability shift means, how EMV works, and whether or not to implement it for their business. Let’s take a look at the top five things small businesses should know about chip cards.
1. Chip cards are very effective at preventing card present fraud
Like most major economies across the globe, the U.S. has begun adopting EMV technology to fight in-store credit card fraud. The U.K., Canada and most developed economies have implemented EMV over the last decade and have seen counterfeit fraud, as well as lost/stolen fraud where PIN was implemented, fall by as much as 54 percent between 2008 and 2013, according to a 2014 Aite Group report. In fact, EMV has been effective at significantly preventing in-store fraud in every country where it is in use. Though the U.S. is a late adopter of EMV and we are still in the early stages of merchant adoption, EMV stands to make a similar impact on fraud here in the States.
Chip cards are effective at preventing fraud because they work differently than traditional magnetic stripe cards. The data required to process a chip card transaction is stored on the card in a microchip, whereas traditional cards store that info in the magnetic stripe on the back side of the card. Using chips offers more security than magnetic stripes because a unique cryptogram is generated for authorizing each transaction. The cryptogram is validated by the issuer and is theoretically impossible to duplicate since it changes with each subsequent transaction. With traditional cards, the data sent to authorize a transaction is static and remains the same for every transaction, making it easy to capture and duplicate for fraudulent use.
2. U.S. merchants now have liability for certain fraud-related chargebacks involving chip card transactions
During the EMV transition period, chip cards are being issued with the capability to be processed in either manner, by data chip or magnetic stripe. So if you don’t have an EMV-capable terminal, you can still run a chip card through standard terminals and POS systems. However, if a customer presents a chip card for payment, and the card is not processed with EMV and fraud occurs, the merchant is responsible. In the past, card issuers had liability for this type of card fraud. But the liability shift is putting the responsibility in merchants’ hands. The result is that merchants without EMV technology are seeing an increase in fraud chargebacks.
3. EMV is not mandatory
There is no mandate making EMV-enabled technology a requirement for merchants. Rather than demanding compliance, the card brands implemented the liability shift to encourage merchant adoption. Card issuers are driving adoption as well by issuing chip cards en masse to cardholders. A PULSE 2015 Debit Issuer Survey found that the number of issued debit cards with EMV capability is expected to reach 73 percent by the end of 2016, and 96 percent by the end of 2017. So merchants can count on the number of chip cards being used at their business to increase sharply over the next couple of years.
Merchants that do not have a significant chargeback risk may choose to wait a bit longer before implementing EMV. While there is a sense of urgency in the marketplace surrounding EMV upgrades, some POS providers are encouraging their merchants to wait until well-established and full-featured EMV terminals are widely available. For some merchants, the benefits of waiting for an EMV terminal that is fully integrated with the POS and also has data encryption and tokenization capabilities, outweigh the benefits of implementing a stand-alone, basic EMV solution immediately. A merchant’s particular chargeback risk is one of the most important deciding factors in the risk/benefit scenario for waiting or upgrading now. Merchants with low average tickets totals or low transaction volume have a greater capacity to wait, whereas high ticket and high volume merchants may have less chargeback tolerance and cannot afford to wait. However, as the migration to EMV continues, merchants should expect the fraudsters to target merchants that have not implemented EMV even if these were merchants that the fraudsters historically did not attack.
4. Not all EMV terminals are created equal
As with all POS equipment and technology, some solutions will make a better fit for a particular business than another. Stand-alone EMV terminals sit beside the POS system or electronic cash register but are not integrated with them, making it necessary to reconcile credit and debit card transactions with the cash drawer manually. When the POS system itself is integrated with EMV technology all payments are reconciled automatically. Either type may include encryption and tokenization to protect card data from being exposed and captured. While EMV is highly effective at preventing counterfeit and lost/stolen card fraud, it does not protect against data compromise. So EMV terminals without encryption and tokenization are by nature inferior to those that do.
Many EMV terminals also come equipped with near field communication (NFC ) technology which enables to devices in close proximity with one another to exchange information. Mobile payments use NFC technology and enable a customer to wave or tap their payments enabled-smartphone to the terminal to initiate a transaction. Implementing an EMV terminal with NFC capability is a good option for merchants interested in keeping pace with mobile payment technology as it provides dual functionality.
5. The transaction flow is slightly different with chip cards
For starters, chip card transactions take slightly longer than traditional cards. Chip cards are not swiped when they’re processed via EMV. Instead, they’re “dipped,” meaning they’re inserted into a slot in the terminal, similar to performing an ATM transaction. The card must stay in the terminal throughout the transaction. Removing the card before the transaction has been completed will cancel it. Many terminals make an error sound when the card is removed prematurely and beep when the transaction is complete to remind cardholders to retrieve their card from the slot. Terminals without audio guides may result in more cardholders forgetting to retrieve their card. In order to improve the cardholder experience and speed up the time-in-land, all of the global card brands have introduced faster EMV processing solutions under the names Quick Chip and M/Chip Fast.
Tap and pay terminals do not require the card to be dipped or swiped. Instead, the customer simply taps their card to the terminal to initiate the transaction. While tap and pay terminals may offer the greatest convenience to customers, many card issuers are not enabling tap and pay capable chip cards yet as it increases the cost of each card significantly. That is likely to change as EMV adoption increases, so forward looking merchants may decide to adopt tap and pay while upgrading to EMV to avoid additional upgrades in the future. This comes with the added benefit of being able to accept payments via mobile devices through applications like ApplePay and Android Pay.
Steve Cole is a Merchant Product Manager, EMV with the payment processor, Vantiv. He has over 20 years experience in manufacturing, business consulting and financial services.