By Andrey Tikhonov, senior director of payment technology, Infinite Peripherals
With the one-year anniversary of the EMV liability shift in the U.S. upon us, we see that progress is evident, but issues regarding implementation, chargebacks and transaction times remain. These issues will most likely continue into 2017. EMV deployment was never predicted to be simple and was one of the biggest changes of the U.S. payments system in the past 50 years.
The transition is continuing more slowly than originally predicted, and with that comes good news and complications.
Today’s Retail Landscape
Approximately 80 percent of U.S. consumers have chip cards; 30-to-40 percent of all U.S. merchants have active EMV locations and about 5 million EMV-ready devices have been deployed to stores. Additionally, counterfeit fraud has decreased by 60 percent since the liability shift, according to Mastercard.
As reported by the “State of Retail Payments 2016 Study” by the National Retail Federation and Forrester Research, 86 percent of retailers expect to have EMV payment terminals in place by the end of this year. However, 57 percent of merchants report that while they have installed EMV equipment, they cannot enable it because they still are awaiting system certification. Of those, 60 percent have been waiting six months or longer.
EMV certification delays have troubled retailers, with queues backlogged two-to-four months among all payment processors and card brands. Many software vendors and payment processors were late to issue their solutions, which are significantly more complex than those for mag stripe transactions. This created a ripple effect among gateways and integrators, which caused players to fall behind, and demand outpaced ready resources as more merchants initiated EMV adoption.
Although Visa and MasterCard have tried to streamline testing and certification, ongoing barriers, like the lack of qualified certification staff, are likely to continue in the short-term. This has caused much frustration among retailers, who report a flood of chargebacks because their EMV solutions are not fully enabled.
One report estimated 260.3 million chargebacks worth $5.8 billion this year, reflecting 17 percent more transactions and 21 percent more dollar value than in 2015. Merchants have responded to this jump in chargebacks with lawsuits, which are expected to increase throughout next year. However, Visa and Mastercard have modified policies to limit the number of chargebacks, and when more EMV certifications are issued and solutions activated, this fraud liability should decline.
In the meantime, confusion and delays in checkout have caused headaches for both retailers and their customers. With some merchants EMV-activated, others equipped but not activated and some still without EMV hardware at all, customers do not know whether to insert the chip or swipe. Inserting the chip leads to longer transaction times, as does removing the card too soon and then having to reinitiate the payment process.
To help streamline transactions, Visa’s new Quick Chip and Mastercard’s M/Chip Fast were recently introduced. American Express and Discover are following suit, but these updates must be supported by payment processors and require a software change. Therefore, they cannot be immediately deployed in-store.
Some important considerations as EMV enters its second year include:
- Ongoing limited compliance among SMB retailers — According to the Small Business Health Index from CAN Capital, 70 percent of small businesses are not planning on investing in EMV in the next 12 months. They do not think it is necessary due to minimal card fraud and the significant expense and burden. Better education and potential incentives may help increase adoption.
- Semi-integrated POS solutions — These will continue to grow, as they give integrators a faster time to market for a complete solution. Such solutions offload sensitive payment data from the POS directly to the gateway or processor, ultimately expediting EMV certification and reducing PCI-DSS compliance requirements.
- Near field communications and mobile wallet payments — NFC and mobile wallets deliver faster transactions and offer several layers of dynamic encryption, yet consumer demand for NFC and mobile wallet payments has been limited. With software vendors requiring additional certification to integrate NFC and banks still needing to issue contactless cards, the short-term impact of NFC and mobile payments is unclear.
- Chip and PIN cardholder verification method — Chip and signature has been criticized for being less secure because it does not address lost and stolen cards. Card issuers are expected to transition to the stronger chip and PIN CVM eventually, requiring another change for retailers and customers at checkout.
- Tokenization/P2PE – Given that EMV is not entirely fraud proof, and offers no protection in card-not-present transactions, merchants are adding these security measures to protect themselves and reduce PCI-DSS scope. The NRF survey showed that 93 percent of retailers planned to have P2PE in place by the end of 2017, with 61 percent also having multichannel tokenization in place in that timeframe.
Given the slow pace of EMV certification, it is questionable whether 90 percent or more merchants will be EMV-ready by the end of 2017, as originally projected by card brands. The conversion process has tremendous logistical challenges and effects on all stakeholders including issuing banks, payment processors, payment service providers/gateways, integrators, merchants, and cardholders.
According to NRF, it takes the average retail store approximately 19 months to implement a new chip card payment system. Today, progress continues slowly with card-present fraud decreasing and retailers and customers adjusting to the new way of payments.