As the home of Silicon Valley and birthplace of many of the planet’s top-selling gadgets and world-changing technology concepts, the United States is often credited with being one of the most technologically advanced nations on earth. But as more people rely on credit and debit cards instead of cash while commerce shifts to mobile platforms, a glaring incongruity emerges: Americans still rely on 1975-era technology for card transactions, swiping a card’s magnetic strip and then signing a receipt.
Americans who travel abroad regularly have noticed that the rest of the world handles card-present transactions differently. In the European Union countries, for example, the default card-present technology is chip and PIN, which involves the use of a card containing a computer chip and the customer keying in a personal identification number (PIN) rather than signing a receipt. There’s no magnetic strip to swipe. Consumers instead insert their card into a terminal that reads the chip.
Chip and PIN is a much more secure approach than swipe and sign, which explains the fact that although Americans make up approximately a quarter of card users worldwide, about half of all credit card fraud takes place in the US. This statistic was cited earlier this year by a US senator during Congressional that focused on ways merchants and banks can better protect consumers.
The Congressional hearings were prompted by high-profile cyber attacks that put millions of Americans at risk for identity theft and credit card fraud. Upscale chain Neiman Marcus experienced a payment terminal breach that affected over a million customers. Additionally, a data breach at a popular retailer Target compromised card data for approximately 40 million shoppers and personal information for up to 70 million more. Target is taking a major step towards the chip and PIN technology by signing a deal with Mastercard for their Redcard.
Given the high stakes involved, consumers as well as companies are starting to pay more attention to payment security, but switching to a new payment platform is a huge undertaking that involves multiple parties and requires significant investments. An effort to orchestrate a change has been ongoing for well over a decade as EMV (Europay, MasterCard and Visa) develops secure payment transaction specifications.
EMV standards will transform the way Americans pay for goods, either in person with cards or via mobile transaction methods. The organization’s goal is to achieve worldwide interoperability and secure payment transactions acceptance on a global scale.
EMV has created and evolved the standards necessary to manage the rollout – technology standards that are backward-compatible to enable launch in a market that will be fragmented for the immediate future. So what is standing in the way and what will tip the scales?
A liability shift will ultimately drive the needed change. Quoted by a reporter in The Wall Street Journal’s “Corporate Intelligence” blog, Carolyn Balfany, MasterCard’s group head of US Product Delivery for MasterCard Worldwide, noted that after October 2015, the company will shift liability in fraud cases to “whichever party has the lesser technology.”
Under the new rules, a merchant can use swipe and sign to process transactions, but if the card has a chip, the merchant would be liable for a fraudulent transaction. However, if a merchant has a chip and PIN-compatible terminal and the bank hasn’t given its customer a chip and PIN card, the bank would be liable for the fraud. Balfany notes that the purpose of this approach is not to shift the consequences of fraud from one party to another but rather to eliminate fraud from the payment system altogether.
That’s a worthy goal, and some financial institutions and merchants deserve credit for developing standards and new solutions to fight fraud, even as rapidly advancing technology moves the goalposts with the rise of mobile payments. While we have not yet achieved a critical mass of U.S. retailers and consumers demanding a transition to EMV, it appears the groundswell is beginning. Banks, retailers, consumers and payment processing organizations are beginning to embrace the EMV trend. Digital River World Payments is excited to be part of this transition and are actively launching international solutions to support our clients.
Soon, we anticipate the U.S. markets will also be saying “so long to swiping.”