Viewpoint: Navigating Important Drivers of Prepaid Innovation. First Stop: EMV (March 2013)
By Lori Breitzke, E&S Consulting LLC
Imagine that tech innovation is like a superhighway. There always are some drivers zipping ahead of the rest at speeds that make the others uncomfortable, while others move at a less frenetic pace. Innovation in prepaid, on the other hand, straddles two different lanes, sometimes remaining ahead of the curve and sometimes not. The former is the case on the consumer features and functionality fronts. For instance, prepaid bill pay became an option for consumers long before bill pay from savings accounts. However, systems integration challenges, security concerns and costs have created traffic in the adoption lane, with deployment occurring at a slower pace. And although it sometimes feels as if prepaid will never clear the way forward in other areas, it’s critical to be prepared, keeping up with the latest trends in payments and how they will apply to prepaid down the road. Over the course of two Viewpoints, I’ll consider two such technology trends: first EMV, then NFC.
There has been plenty of buzz lately about EMV, but let’s step back and take a closer look at it. In the most simplistic terms, EMV exists to authenticate the cardholder to the card to prevent card present duplicate card fraud. One reason EMV has not taken off in the United States is that we don’t currently have a lot of duplicate card fraud (i.e., fraud from skimming). In our country right now, this kind of fraud typically affects larger merchants, which is why Walmart already has EMV-enabled terminals and many large retailers will start deploying EMV-enabled point of sale systems in the next year. They are making this investment despite the fact that few EMV cards are in use in the United States. After all, the largest retailers have the most to gain by deflecting the liability for card present duplicate card fraud.
This requires further explanation. By April 1, 2013, acquirers are supposed to be able to process EMV transactions to the payment network. However, because this date provides no mandate or financial incentive for anyone to issue an EMV card, it is unlikely to matter much. Just as significantly, the next real EMV migration incentives do not take effect until 2015. The incentives center on “liability shift,” which dictate that transaction liability lies with whichever party in the payment chain is not EMV-enabled. On April 1, 2015, Visa will institute a liability shift wherein U.S. third-party acquirer processors and sub-processors must be able to support EMV data. On Oct. 1, 2017, Visa, MasterCard, American Express and Discover will institute a liability shift for all point-of-sale devices, excluding fuel pumps. After these dates, if a merchant does not have an EMV terminal and if an EMV card is presented at the point of sale, the merchant bears the liability. If an acquirer gets an EMV transaction and can’t transact it, the liability burden rests on the acquirer. This might sound like a big deal, but what’s important to recognize here is that the liability shift doesn’t increase the liability of the card issuer, which under the original rules bears all the risk.
The liability shift, therefore, provides weak incentive for issuers to issue EMV cards. Although it allows issuers to deflect chargeback losses, those losses are not that high. In addition, the liability shift does not represent a huge incentive for small businesses to upgrade to EMV-enabled systems. A dry cleaner that takes 20 transactions a day is unlikely to have a ton of chargebacks or duplicate card fraud. After all, who would pay for someone else’s clothing from a dry cleaner who might know the customer personally? For large retailers that experience significant chargeback risk for duplicate card fraud, however, the liability shift is an incentive to upgrade to EMV-capable systems.
Prepaid Issuers and EMV
What does all this EMV buzz mean for prepaid? It likely will be years until EMV affects prepaid in the United States. The liability shift is the first step, but there is significant infrastructure in the United States that also has to change before EMV will be a serious concern for prepaid. EMV cards have to be issued, merchant POS systems must be EMV-enabled and acquirers have to enable their systems, to name a few.
If the goal is to really get EMV moving, significant financial incentive has to be in place. Expect to see a reduced interchange fee for processing an EMV transaction, which would be a nod to EMV’s potential to reduce fraud. Also likely is a penalty for issuers that issue non-EMV cards. Such a penalty would force issuers to overcome the painful fact that an EMV card doubles the cost of a card.
No timetable exists for these kinds of financial incentives—at least not yet. But prepaid players shouldn’t be complacent about EMV. Like drivers sitting in traffic who finally see the open road ahead, issuers will get a financial incentive for issuing EMV reloadable cards. At that point, prepaid players that haven’t plotted their course for dealing with EMV will be left in the dust.
Lori Breitzke is founder and president of E&S Consulting, a payments industry consultancy that advises merchant acquirers, retailers, card marketers and issuers in a broad range of payment and financial services domains, including prepaid program management, competitive research, training, marketing, POS hardware and software management, and partner recommendations. View E&S Consulting’s blog at www.eandsconsultingllc.com.
In Viewpoints, prepaid and emerging payment professionals share their perspectives on the industry. Paybefore endeavors to present many points of view to offer readers new insights and information. The opinions expressed in Viewpoints are not necessarily those of Paybefore. If you’re interested in contributing to Viewpoints, contact Loraine DeBonis.