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Portals and Rails, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Portals and Rails and look forward to collaborating with you.

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August 22, 2011


Is recent EMV announcement the catalyst the U.S. needs to catch up?

During this past year, the team at Portals and Rails has published several articles exploring the growing risks in card-based payments and the need to move to a more sophisticated and secure enabling technology. But overhauling a payment system is no easy task, as there are many players that need to collaborate, from the card networks to the bank issuers and merchants. How does the industry organize itself to orchestrate a much-needed transition?

The merchant community in particular has rightfully expressed concerns over the infrastructure investment costs for card acceptance terminals. While they acknowledge the need to migrate to a more secure payment system that does not rely on outmoded magnetic stripe card technology, they understandably want a future-proof investment strategy.

Visa's recent announcement about its plans to accelerate chip migration and the adoption of mobile payments may just provide the clarity in direction and sufficient incentives to get merchants moving.

Reduced PCI compliance requirements and liability shifts: Carrots and sticks
Visa's plan will require merchants to invest in chip-acceptance terminals as well as bear responsibility for losses resulting from magnetic stripe card fraud if they continue to accept those cards beyond a specific transition period. Right now, the banks that issue the cards bear those costs. So Visa is essentially imposing a counterfeit fraud liability shift as the metaphorical stick to encourage merchants to comply with the plan. Since the United States is currently the last developed country to implement a plan to migrate to chip-based card payments and agree to such a liability shift, this is a significant move.

But Visa's plan also contains some compelling incentives for the merchant community. PCI data security compliance requirements are costly and increasingly ineffective in combating card fraud schemes like card skimming. The Visa plan will eliminate certain PCI compliance requirements for merchants for whom at least 75 percent of their Visa transactions originate from chip-enabled acceptance terminals. Merchants will still have responsibility for protecting customer authentication information such as security codes and PINs. The prospect for improved security coupled with the reduced PCI compliance costs should be a welcome benefit to merchants.

Building a future for mobile payments
By initiating a plan to migrate to both contact and contactless chip technology at the merchant point-of-sale, the Visa plan may actually speed up the adoption of mobile payments. Building out the acceptance infrastructure will be necessary to support contactless payments and other chip-based emerging technologies in the future.

Conclusion
The growing incidence of global card fraud schemes is drawing critical attention to the need to overhaul the U.S. card payment system. Not only are countries in the European Union moving to chip-and-PIN technology to support their card payments, but they've also discussed banning the acceptance of magnetic stripe cards as a possibility. What this means is U.S. travelers will not be able to use their payment cards abroad. As a matter of fact, if you've traveled to Europe lately, you've undoubtedly discovered that some merchants are not equipped to accept our U.S. payment cards now. The move to chip technology for card payments has been coming—but no one knew exactly when or how. Clearly for merchants, the Visa announcement represents a roadmap for the future.

Cindy MerrittBy Cindy Merritt, assistant director of the Retail Payments Risk Forum

August 22, 2011 in chip-and-pin, payments, payments risk, risk | Permalink

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