The Switch To Credit Cards With Embedded Computer Chips Has Serious Downsides For The US Payments Industry

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Credit cards and debit cards with embedded microchips are coming to the U.S. They are known as "EMV cards," and most merchants will accept them by year-end 2015. (EMV is short for Europay, MasterCard, and Visa, which created the standard in Europe.)

EMV cards are supposedly more secure and fraud-proof than magnetic stripe cards, which are still dominant in the U.S. market. But, as we explain in a new report from BI Intelligence, they aren't a cure-all for fraud risks, and they pose other disadvantages too.

Consider:

• The new cards, pushed by Visa and MasterCard and other players, mean hundreds of thousands if not millions of merchants and retail banks will soon have to change their register and terminal systems. The back-end business of credit card-processing will also need a big overhaul. EMV is an $11 billion opportunity for providers of payments hardware, software, and services, but a big cost to the retailers.
• That's why many retailers are dragging their feet on EMV, so that they can wait and replace their systems within the normal amount of time for a terminal hardware upgrade, rather than accelerate the replacement cycle on account of the new standard.
• The EMV migration will not necessarily benefit all players, it may actually lead to more e-commerce fraud. It will alleviate fraud perpetrated with counterfeit credit cards, but it will likely lead to a spike in "card-not-present fraud," which may hurt U.S. e-commerce retailers. In the report, we show how EMV migration helped reduce fraud in the UK, but also led to a spike in other forms of credit card fraud. (See chart, above.)
• It will take a while. We estimate that the total cost of implementing EMV in the U.S. will be about $11 billion (including $7 billion for new hardware), representing a huge cost - but also a big opportunity for payment technology and service providers.
• There's also some uncertainty over which variant of EMV transaction will catch on in the U.S. market, and that uncertainty risks creating a great deal of consumer confusion. Will consumers plug their chip cards into special terminals, but still sign receipts, or will it be "chip-and-PIN," which will require people to enter a PIN number instead of a signature?

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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.
• Breaks down 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.

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