On Smart Card Chips, Visa Changes Course
After years of steadily holding back support for embedding smart chips into U.S. issued cards, the largest card brand has announced it will now back the use of smart card technology in the U.S.
The use of chip-embedded cards has become the norm overseas and has significantly reduced fraud at point of sale terminals there.
"By encouraging investments in EMV contact and contactless chip technology, we will speed up the adoption of mobile payments as well as improve international interoperability and security," said Jim McCarthy, global head of product at Visa Inc.
EMV stands for Europay, Mastercard and Visa and is the standard for embedded chip cards.
"As NFC mobile payments and other chip-based emerging technologies are poised to take off in the coming years, we are taking steps today to create a commercial framework that will support growth opportunities and create value for all participants in the payment chain." NFC stands for near field communication. Having the card or mobile phone close to the terminal enables the transaction communication.
Not only will chip technology accelerate mobile innovations, it is also expected to secure payments into the future through the use of dynamic authentication. Chip technology greatly reduces a criminal's ability to use stolen payment card data by introducing dynamic values for each transaction, the card brand said in its announcement.
"Dynamic authentication is the key to securing payments into the future," said Ellen Richey, chief enterprise risk officer at Visa. "Adding dynamic elements to transactions makes account data less attractive to steal and takes more merchant systems out of harm's way, shrinking the battlefield against criminals. The migration to chip technology will be an important security layer and a critical step in a comprehensive strategy to use dynamic authentication across all markets and all channels."
Visa's policy initiative didn't include any direct deadlines or incentives for issuers, but it included incentives for merchants to start not only accepting chip-embedded cards but also be able to conduct contactless transactions as well.
As part of the policy, Visa announced that merchants with terminals able to accept both chip and contactless transaction, and at least 75% of card transactions use the new technology in a given year, will no longer have to validate their compliance with payment card industry standards for that year.
This provision will kick in as of Oct. 1, 2012. Processors and sub-processors will need to be fully able to process chip transactions by April 1, 2013.
Merchants have long complained that remaining PCI compliant is expensive and technically challenging. Merchants who are not PCI compliant are seen as more vulnerable to card fraud and have faced fines from the card brands and additional liability for card fraud damages.
The card brand emphasized as well that the terminals will need to be able to accept both contact and contactless card transactions and that merchants will still need to protect any card data that they store.
The change in policy also carries a possible punishment along with an incentive. Currently, POS counterfeit fraud is largely absorbed by card issuers. With the liability shift, if a contact chip card is presented to a merchant that has not adopted, at minimum, contact chip terminals, liability for counterfeit fraud may shift to the merchant's acquirer. The liability shift encourages chip adoption since any chip-on-chip transaction (chip card read by a chip terminal) provides the dynamic authentication data that helps to better protect all parties, the brand said.
This provision kicks in Oct. 1, 2015 for general merchants and October 1, 2017 for gas stations.
Eduardo Perez, Visa's global head of data security, said the company had decided to start backing embedded chip cards, in part, after the Durbin amendment’s passage had settled the regulatory picture.
“After the passage of Durbin, we saw that we had some regulatory clarity to move,” Perez said. In addition, he said Visa was attracted by the notion of having its cards be usable globally instead to the situation now where, often, cards issued outside the U.S. cannot be used inside and U.S. issued cards cannot easily be used overseas.
Reaction from the industry has been largely positive
The card brand also wanted to cut the costs of fraud and continue to advance contactless payments that it believes will eventually lead to payments being made from mobile phones.
“We were getting calls from some stakeholders who wanted to know the road ahead for payments,” Perez said. “What technologies did we see on the horizon so they could prepare.”
CUNA Mutual applauded the move. Ann Davidson, senior consultant for CUNA Mutual Group Risk Management, said the insurer looked forward to a time when the costs of counterfeit card fraud, the most prevalent form of card fraud, would reduce markedly.
The chief benefit of the new cards will be to suck the energy out of the market for stolen credit card numbers, thus rendering them less appealing to potential thieves. Dynamic verification generate a different authenticating value with each transaction, thus making the card numbers themselves useless to generate counterfeit cards. But Davidson stressed that this would not be the biggest news for credit unions.
“The liability shift is the big change,” she said, “since currently in cases of counterfeit card fraud, credit unions bear all those costs.”
Randy Vanderhoof, executive director of the SmartCard Alliance, an association of firms formed to advance smart card technology, said the smart card industry was ready to supply smart cards to credit unions that might want to start issuing them. Vanderhoof said the first cards would have to carry magnetic stripes as well as chips and contact-less technology and could come in at a higher cost than magnetic stripe-only cards. But he added that the costs would drop with additional volume and that card issuers would probably make those costs up over the medium term as their fraud losses dropped.
Robert Hackney, president of Card Services for Credit Unions, the association of credit unions that process their card transactions with FIS, also praised the move and said he expected CSCU would be able to help its member credit unions get the best prices on the new cards as possible.