$6 billion dollars. That’s not the amount an S&P 500 company is paying to acquire a rival, that is the estimated cost that all American retailers will pay to upgrade their credit cards machines to accept the new EMV chip credit cards that became mandatory one year ago.
Many consumers probably just began using their chip cards for purchases in the last few months. Approximately only a third of all merchants currently have the capability to accept chip card payments causing the transition to EMV chip cards to not be as smooth as expected for most merchants.
Fraud Liability Transfer
The primary reason merchants who haven’t upgraded their payment systems yet do not like the new chip cards is because credit card issuers have transferred the fraud liability responsibility from themselves to the merchant that only accepts the traditional swipe of the magnetic strip to pay for a purchase. This means the merchant has to repay the fraudulent charges to the original cardholder, plus transaction fees when the purchase was made with a magnetic swipe instead of an EMV chip. In the credit card industry, this reversal of charges is known as a “chargeback.”
Before the liability shift was transferred to the merchants, credit card issuers were responsible for reimbursing approximately 62% of the $16.32 billion in credit & debit card fraud in 2014. Since the liability shift mandate went into effect on October 1, 2015, except waivers have been issued for ATMs and gas stations through 2017, merchants have been responsible for an increasing amount of fraudulent credit and debit transactions ever since.
Some merchants have even challenged the mandate in court because so few merchants have upgraded their systems even though a year has passed since the fraud liability transfer. And, accusations of collusion have also been painted against the credit card companies from the merchants as the deadline was self-imposed.
New Systems Need to Be Certified
Even though the fraud liability transfer happened in October 2015, most major retailers did not fully upgrade their payment systems until the summer or fall of 2016. Almost an entire year after the mandate went into effect.
One large complaint from many merchants is the additional cost to upgrade the machines. It is estimated that the total cost for all merchants across the country to upgrade their credit card readers to accept EMV chips is $6 billion. Once each merchant has upgraded, they have to be inspected by each credit card issuer to certify that the machines function correctly before they can be used. Some merchants have been waiting for their machines to be certified before they can be used.
Part of the delay can be related to waiting for the credit card companies to inspect and verify that their machines function properly. How many consumers have recently admitted that they “dipped the chip” only to realize they had to swipe the magnetic strip instead? While another part of the delay can be software glitches experienced during the upgrade process that delay the merchants from having their machines verified.
The credit card companies see this issue from a slightly different perspective. Prior to the October 1, 2015, deadline, the issuers claim that all merchants had three years notice to upgrade their machines before the deadline. But when the 2015 deadline arrived, the credit card issuers had only upgraded 40% of all U.S. credit cards to have embedded EMV chips. The full reasons why more merchants did not upgrade sooner and also why the credit card issuers didn’t upgrade all credit and debit cards to include an EMV chip by October 1, 2015, might never be known. But, the current fraud liability transfers probably will not change anytime soon.
The Future of Chip Cards and Merchants
Implementing chip cards have been a learning process for merchants and credit card issuers. EMV chip cards are here to stay and many believe their main rival will be digital wallets that allow consumers to pay by swiping their smartphone instead of an actual credit card. Credit cards payments are a necessary payment method and most merchants that haven’t upgraded yet, are better off taking the risk of having to pay chargebacks for fraudulent purchases than only accepting cash, until their machines are upgraded and certified.
As the median fraudulent purchase is $399, this means merchant profits can be quickly erased if they receive several chargebacks each month. If these chargebacks have occurred while the merchant has been waiting for their machines to be upgraded and certified, it will only continue to stoke the fire between merchants and credit card issuers.
As more retailers have made the change, MasterCard has reported in-person credit card fraud has decreased approximately 57% at retailers that can accept chip cards, but, it has risen 77% among merchants that do not accept EMV payments yet. Until magnetic strip technology is completely phased out, fraudsters will still be able to create counterfeit cards with a functioning magnetic strip that can be used for fraudulent purchases.
Once the merchant upgrades their machines to accept EMV payments, the fraud liability will return to the credit card issuer. But for now, approximately 75% of all merchants are still on the hook for most fraudulent purchases.
Author: Jeff Gitlen
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