October 1 was the deadline for a shift in payment card fraud liability that marks a major effort to boost U.S. adoption of smarter credit and debit cards.
October 1 was the deadline for a shift in liability for merchants who accept credit and debit cards, which means just about all merchants today. It passed without a lot of notice, but it marks a major effort to boost U.S. adoption of smarter payment cards.
Merchants now are supposed to be using Point of Sale (POS) terminals that include EMV chip readers, which eventually will replace the magnetic stripe readers we are familiar with now. The chips are expected to reduce counterfeit card fraud and generally improve security. While the mag stripe card that has been in use for decades is a passive source of static information, the chip card is an active participant in transactions, making it more difficult for criminals to counterfeit a card or to use a stolen one.
EMV stands for Europay, MasterCard, VISA, who have spearheaded creation of standards for chip-based payment cards. To encourage the use of this technology, merchants who do not use it as of Oct. 1 could find themselves on the hook for the cost of fraud that formerly was absorbed by the card issuer.
You can be forgiven if you have not noticed this change. I use my credit card a lot. It has included a chip for at least a year now, and I have not yet been asked to insert it into a chip reader. I asked about this at my local supermarket—which is locally owned, not part of a chain—and was told they had the new readers on a few of the checkouts, but weren’t using them yet because of technical problems.
The United States, probably because it is heavily invested in legacy infrastructure for what was once the state-of-the-art mag stripe card, is lagging the world in adoption of chip card technology. According to EMVCo, which maintains the chip-based payment technical specifications, the United States had virtually no chip cards in use in 2013 although chips accounted for the bulk of cards in Western Europe and have been widely adopted elsewhere. By the end of 2014 the chips were in 7.3 percent of U.S. cards, but they accounted for less than one percent of transactions in this country.
Since then, the number of chip cards in circulation in the United States has increased sharply, to more than half of all cards by some estimates. If you check your wallet, you will probably find at least one card with the little metallic circuits on the front. But use of POS chip readers by merchants still is in its earliest stages. According to most estimates fewer than 10 percent of terminals are equipped to read the chips. Most merchants, especially the smaller ones, likely are waiting for their next equipment upgrade and are accepting the possibility of increased liability in the meantime rather than making the additional capital investment to get the readers early.
Equipment with built-in POS terminals, such as gas pumps and ATMs, are getting a little more time to upgrade. ATMs will have at least until October of 2016, and gas pumps will have until 2017.
Meanwhile, mag stripes are not going away. Cards will still have them and POS terminals will still read them. If you present a chip card at an old terminal, it will read the mag stripe. If you present a non-chip card to a new terminal, it can read the stripe, too.
What does this mean for consumers? Hopefully overall better card security. Beyond that, little except for learning a new routine at the checkout: Inserting your card into the reader rather than swiping it, and leaving it there until the transaction is approved. Consumers still will be shielded from fraud liability. But who picks up the tab for fraud is changing somewhat.
Because of the number of payment processors involved, the details of the shift are not completely clear. But according to most accounts, liability for counterfeit chip card fraud will apply to the entity with the least modern technology. Issuers who issue cards without a chip and only a mag stripe will be responsible for losses. Merchants who do not have chip card readers will be responsible for losses on chip cards. If everyone is using chips, liability remains with the issuer, as it normally has been.
At the end of the day, this week’s deadline is not Earth shaking. But it does mark the beginning of a more modern payment card environment in this country.