The industry has generally agreed on EMV (the Europay-Mastercard-Visa standard) as the necessary next step for the U.S. card market. As a result, another question has been presented: Which type of chip technology, chip-and-PIN or chip-and-signature, is best suited to support the country’s migration to EMV?
Even as the terms “EMV” and “chip-and-PIN” became nearly synonymous over the past few years, some players have chosen a different route – namely, chip-and-signature. But to many, the assertion that issuers should add chip technology to their plastic without also configuring the chip to work alongside a customer authentication code, like a PIN, is not a great idea.
To understand why, let’s start at the beginning.
The EMV Back Story
EMV was developed because European card issuers needed a way to provide merchants with quick, secure authentication. Europe’s poor telecommunications infrastructure and a great number of unmanned terminals and kiosks made it difficult to provide this authentication with traditional mag-stripe cards. EMV, supported by chip-and-PIN technology, became the answer.
Only after the chip cards were in play did the European payments industry realize the cards’ natural resistance to duplication. Coupled with the security of PIN authentication, the cards presented two significant hurdles to would-be thieves.
In the U.S., the telecommunications system is vast and sophisticated, which makes the need for EMV’s offline authentication less desirable stateside. The technology’s fraud resistance, on the other hand, is extremely attractive to the U.S. payments industry – particularly given the fact that card skimming attacks are only becoming more sophisticated and more frequent.
This is not to say fraud prevention is the only benefit the U.S. stands to gain from migration to EMV. As well, we understand that Americans, who quite regularly leave the country for business and pleasure, are among the last to carry mag-stripe plastic. U.S. card issuers working hard to maintain wallet share know how important it is to enable international transactions.
Traveling without a PIN
While there are international terminals capable of accepting chip-and-signature transactions, the ones that don’t are generally unmanned, making completion of the transaction impossible. Take, for example, a cardholder traveling by train in Europe. Many European train-ticket kiosks require a PIN for offline authorization, leaving a chip-and-signature cardholder without options.
Even in manned-terminal situations, chip-and-signature cardholders may have a difficult time explaining the technology to merchants abroad. The merchants may not be familiar with signature authentication; they may also speak a different language than the cardholder, further complicating communication.
The fraud-prevention benefit, too, stands to be weakened without a PIN. Experts agree an authentication code known only to the cardholder (such as a PIN) is among the most successful strategies to prevent fraudulent transactions. For this reason, many retailers are expected to push for chip-and-PIN to lower the incidence of fraud in their stores.
The Best Return on Investment
To build momentum for a U.S. migration to EMV, Visa has launched a series of directives for merchants and processors. In addition to requiring all processors to support chip transactions by April 1, 2013, the network is giving merchants an added incentive to also support chip-and-signature transactions.
By October 2012, any merchant who accepts 75% of its Visa transactions through a chip-ready terminal will not have to validate compliance with the Payment Card Industry (PCI) Data Security Standard – an effort that can cost upwards of a half million dollars each year.
It’s easy to understand why Visa – with its vast signature network – stands on the side of chip-and-signature. The network has a vested interest in continuing to run credit and debit card transactions over signature rails. There is a huge revenue distinction between signature- and PIN-based authentications. Issuers have to remember, the loss in interchange revenue from EMV technology will be substantially exceeded by the fraud prevention cost savings.
Other major card issuers, including Wells Fargo, Citigroup and Bank of America, have announced intentions to migrate to chip-and-PIN, leaving many credit unions confused about the right direction for their unique cardholder groups.
So, which chip technology is right for the nation’s credit unions?
I believe the answer is clear. With two main benefits – lower fraud risk and more interchange from international transactions – chip-and-PIN technology will provide the best return on an issuer’s investment.
Chip, PIN ... and Mag-Stripe
Many large retailers have made public announcements regarding their ability to accept EMV. However, smaller merchants are not quite ready, choosing the “wait and see” approach.
Until such a time when EMV achieves critical mass in the U.S., issuers must also consider leaving mag-stripes on all EMV plastic. Even with Visa’s deadline, merchants across the country are still evaluating whether or not to invest in chip-card terminals now. And after they inevitably make the decision, switching POS and back-office systems to the new technology will take time.
In a post-Durbin Amendment world, achieving card portfolio profitability has become increasingly complex. Chip-and-PIN technology, coupled with a mag-stripe, is the credit union’s one-size-fits-all approach to EMV, enabling more interchange income, increased security, and overall, more satisfied and loyal cardholders.