What If?
What If...
CARD TECHNOLOGY
CHANGED?

by Paul Coenen

   Remember how we approached communications failure in our last article? The concept was to try to determine what would happen if a seemingly unlikely event took place; a chance to sit back and say, “What if…”
   And so, today’s topic is, “What if…card technology changed?” As before, we can quickly note that card changes are not all that uncommon. Store-based cards and single bank cards and library cards evolved into BankAmericard and MasterCharge, which became Visa and MasterCard. Magnetic stripes, with multiple tracks of industry specific information, yielded to Track II and some overlaps, EMJ-etc.
   Finally evolution and standardization brought smart cards and then EMV cards. EMV (Europay, MasterCard, Visa) cards, just mentioned in our last article as a way to handle loss of communications problems, are coming.
   Briefly, EMV cards are cards that are compatible with the EMV specifications. The EMV specifications ensure worldwide interoperability for smart payment cards. They define the interactions between the cards and a chip-reading terminal. EMV cards are both POS and ATM cards.
   The main stated purpose of EMV cards is to prevent fraud. Regardless of how fraud is calculated, each country’s experience is different. But, it’s no surprise that European Union countries that are first with EMV have the highest reported fraud levels.
   EMV is not coming suddenly to the U.S. MasterCard and Visa have not yet even defined an EMV compliance date. There may be several reasons for this: Fraud is not as big an issue in the U.S. as in other countries and the U.S. has an elaborate telecommunications network that enables merchants to perform low cost, on-line authorizations. The unspoken reason is that EMV costs a lot and U.S. Visa/MasterCard card issuers either have not decided to pay that much or where to shift the cost burden.
   In Europe, the deadline for EMV compatibility is January 1, 2005. Asia/Pacific is set for January, 2006. Middle East and Africa, January, 2006. Of course, there are slight differences and discrepancies between MasterCard and Visa.
   There will be a shifting of liability for EMV cards. Currently, if an Issuer authorizes the transaction and the merchant fulfills his/her other contractual obligations of honoring the card, the merchant should get paid. Even if the card is actually stolen or altered or skimmed or otherwise dishonored, the merchant should get paid.
   Beginning in 2005, the liability will shift to whichever party is not EMV-ready. Think of it this way: Merchant Acquirers (ISOs) become responsible for fraud if their merchants lack EMV compliant terminals. And, of course, Acquirers (ISOs) typically pass those kinds of costs on to their merchants.
   The greatest impacts of EMV for U.S. ISOs will be both in technology and in the relationships with their merchants. Every merchant who will participate in the U.S. version of EMV will be looking at a new terminal(s) that will read EMV cards and a straight forward understanding of what the merchant must do and any new procedures. If you sell POS terminals as a profit making business, be aware that the terminals you will be selling should be EMV compatible.
   For ISOs, there seems to be a best way to handle this, regardless of when the U.S. gets around to complying with EMV. Being fully aware and offering the necessary terminals and information will be a leverage point both to your current merchant base and to the new base created by those who delay or don’t offer this service.
   It would be a good thing to be fully aware of EMV and what your Processor expects to do and when. This may be only something on the horizon, but it’s something for which you should know and plan. And, because useful lifetimes of terminals and potential changes in contracts are involved, EMV is something you want and need to know about now.
   Also, be aware that the entire EMV discussion began before the merchant suit with Visa/MasterCard was settled. Whether requiring the merchant to make necessary terminal changes to accept cards and shifting the burdens of liability may not work in the post-suit environment.
   Regardless of your sentiments on the matter, look at www.emvco.com to learn more about what is coming. Be sure to keep in touch with your Processor to be aware of their plans for EMV.
   If you have a “What if…” type question, please feel free to send it to me. I’ll try to fit your questions into these articles and give you a thoughtful and innovative answer.
   Let’s just say there are three guidelines:

  • Answers must be limited to the size of this column. That’s a nice way of saying that questions that have long and detailed answers are probably not subjects that can be addressed;
  • No questions like “How high is up?” can be fully and correctly answered without significant artificial assistance, like lots of beer or EMJ. Always remember, the world cannot end today, because it’s already tomorrow in Australia; and
  • This column, as good as it may get, cannot replace a full study and analysis. Again, a nice way of saying I probably can’t solve a specific problem without seeing and knowing all of the details.