New, More Secure Credit Cards With Microchips Will Transform The Payments Industry

Credit card technology in the U.S. is about to change.

In part, thanks to a renewed focus on credit card data theft following the massive breach at Target stores, the electronic payments industry is championing a new security standard centered on cards with an embedded microchip.

The chip card standard is more secure than conventional magnetic stripe-bearing cards for several reasons. The embedded chip allows the card to communicate with a payment company's computer servers. That means the card's security features aren't static - they can be refined and reinforced over time. In contrast, if magnetic stripe cards are "skimmed," the data can more easily be used to create clones of the card to commit fraud.

In a recent report from BI Intelligence we look at the new so-called EMV standard, what it is, how much it will cost to implement, how much it could save in terms of mitigated fraud, and whether or not the upgrade will ultimately be worth its cost. We also examine who the potential winners and losers could be in the switch over, and whether consumers will authenticate EMV transactions with a PIN or a signature.

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Here are some of the key takeaways from the report:

• The U.S. has an enormous fraud problem. The U.S. share of fraud volume outpaces its share of payment card volume by about two-to-one. In 2012, the U.S. accounted for 47% of $11.7 billion in global payment card fraud, but only 23.5% of global card volume, according to the Nilson Report.
• We estimate that the total cost of implementing EMV in the U.S. will be about $11 billion. $7 billion of that spending will go toward upgrading to new payments terminals and software, a cost that will be largely shouldered by the retail industry.
• The benefits of the EMV standard will not be distributed evenly across the payments industry. Fraud perpetrated with counterfeit credit cards will decrease because EMV cards are more difficult to copy. But that will lead to a spike in "card-not-present fraud," as criminals move to different channels, particularly online transactions. This is a threat to e-commerce retailers.

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In full, the report:

• Gives detailed breakdowns of the costs of upgrading hardware, software, ATMs, and reissuing payment cards.
• Looks at the key deadlines that payment card networks are using to pressure the industry to make the switch to EMV.
• Explores whether the card networks will be successful in getting different players in the payments space to adopt the new standard.
• Analyzes how the card networks will benefit from pushing their partners to adopt EMV, including the potential upside for mobile payments adoption.
• Includes an interview with a key EMV expert who gives us insights into what the migration will look like, why it's important to make the change, and the types of businesses that will take the longest to upgrade.
• Explains why the rollout of EMV might turn out to be a Pyrrhic victory for many of the players involved, even when the fraud cost reduction is taken into account.