In part one of this blog, I talked about how banks have been slow to issue cards with chips in them. They don't hold all the blame when it comes to the astonishingly slow EMV rollout, however. Merchants themselves are also well behind the 8-ball in terms of upgrading their infrastructure. In fact, figures show that only about 27% of point of sale terminals are equipped to handle EMV transactions.
As I was looking at some of the details behind the EMV rollout, I uncovered something very interesting. The majority of the cost in moving to EMV doesn't come from issuing new cards. Issuers can actually produce cards with integrated EMV chips very economically. The largest cost comes from the $500 required for every point of sale device to be upgraded. That cost is worn directly by the merchants.
I think in order to see the adoption level here in the US reach what we've seen in other regions, it's going to take someone to suffer from extensive fraud. That's when everyone will finally wake up and see the urgency. Fraud liability has traditionally sat with the card issuer. Now it's going to lie with the merchants that have yet to upgrade their point of sale devices. These merchants really need to consider the investment as a risk mitigation strategy. Would they rather spend $500 on a new point of sale device, or are they prepared to take the risk on all the transactions they're processing?
To put this all into perspective, US banks make $61 billion a year in interchange fees for point of sale devices. Fraud costs them $30 billion. That means that for every dollar that a bank makes on interchange fees, 50 cents are from fraudulent transactions, this can be reduced with real-time payments. When you look at it that way, it's simply not sustainable for merchants to subject themselves to that $30 billion in fraud they're not helping to prevent. The cost of $500 for each point of sale device is a drop in the bucket by comparison.
Aside from increased security, merchants will also have the ability to track loyalty programs and coupons more effectively once they gain EMV capability. The chips that are integrated in EMV cards can have multiple applications in them. For example, Best Buy credit cards could automatically load rewards program details and apply discounts whenever a customer uses it at a Best Buy with EMV points of sale.
Should customers be concerned about their privacy as their cards become more advanced? Yes, there's a chance embedded loyalty tracking in store branded cards will become something to consider. However, EMV transactions are actually more private than any other type of transaction. There's a unique number sent for each payment which can't be associated by anyone other than the card issuer.
Looking Forward
The sweet spot right now is clearly with high value credit cards. I think the EMV rollout for credit cards for household incomes greater than $75,000/year will be complete by the end of this calendar year 2015. Banks will stagger the rollout from both an investment perspective and a customer support perspective. They're now having to educate people to insert the card and leave it in while the transaction is being processed. It's not like an ATM where you stick the card in and remove it immediately.
There's enough customer support to ensure the technology shift is adopted, particularly by non-tech savvy users. I think 2016 will definitely be a year of maturing as EMV rolls out across the broader population. October 2017 is when the special dispensation for gas stations ends. The liability shift will hit gas stations after that deadline. Card issuers need to have their systems in place and ready to roll well in advance. Otherwise, there would be people unable to pay for fuel at the pump. That would be a customer support call that nobody wants to make.
