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Ask an Expert

Maarten Bron

Director of Innovations

Why is it important for a country like the U.S. to migrate from magstripe payment cards to EMV?

EMV is the secure, embedded chip designed to protect debit and credit cards against fraud resulting from skimming, theft and cardholder delinquency. Beyond the obvious benefits for the industry as a whole, the U.S. is the last big market to adopt EMV technology, and the industry does not want to remain isolated from the rest of the world via an incompatible and more vulnerable payment technology (for example, magstripe).


What do you see as the most significant impediments
to EMV migration in the U.S.?

The adoption of EMV technology in the U.S. is being driven by a “carrot and stick” approach. The carrot includes the incentive programs offered by the big payment schemes, as well as future fraud reduction. The stick is the EMV liability shift that allows a bank to offload fraud losses to an acquirer’s (merchant’s) P&L in case of noncompliance. As of October 2015, the shift in liability will begin to hurt U.S. acquirers.


Over the past decade, the card payment industry in the U.S. has had to cope with some interesting change drivers. Several large, multibillion-dollar lawsuits on interchange fees and restrictive card acceptance policies set the stage between merchants and the banking industry. Merchants and processors made a fine art out of finding the most cost-effective transaction path to a card’s issuing bank, a practice that — by the very nature of the EMV specifications — is almost impossible to replicate using EMV technology. The credit crisis sparked banking reform in the U.S., where the Durbin Amendment (part of the 2010 Wall Street Reform Act) imposed additional routing requirements that made the gap between reality and the technical limitations of EMV only larger. Moreover, the Durbin Amendment regulates interchange, making the debit card business less profitable for the very banks that are expected to invest in EMV technology.


This decrease in profitability has combined with the significant costs of issuing EMV chip cards and replacing payment terminals at retail to slow the migration to EMV in the U.S. To add to the confusion, a judge recently ruled that the Federal Reserve’s transposition of the Durbin Amendment into banking regulation was not correct. While this was a win for the merchant community, expectations are that interchange rates will be capped at even lower levels, and banks will be forced to make additional transaction routes available — exactly the topics that have hindered EMV adoption in the U.S. from the outset.


What are the most serious security issues facing the payments industry today?

There is no one single gaping security hole that we should hurry to fix. However, credit cards were invented years before the Internet and smartphones saw the light. To a certain extent, the credit card architecture was not designed as a “funding mechanism” for other payment channels. The industry will witness explosive growth in online commerce in the coming years. We are now deploying EMV, PCI, and tokenization as patchwork solutions. In theory, these three should have the following effect:


However, I am also afraid that by inventing things like tokenization, we bolt new tokenization vaults into the mix (which is also subject to PCI DSS and can also be the target for hackers and cyber attacks, etc.). There comes a point where the whole thing will collapse under its own weight.


We believe that tokenization and end-to-end encryption are Band-Aids on a system that is already almost too complicated; we also believe there is nothing else the card schemes can do in the short term.   Sometimes when you fall over, you need a Band-Aid to keep things together whilst you are on the way to hospital. This is where we are now: we need to patch the current system whilst things evolve on their own. There is a reason that Visa has invested in Square, and MasterCard openly states that it is “pro innovation” at its conferences. The card schemes themselves cannot innovate at the same pace as the market is moving, for a wide variety of reasons, so they are each placing bets on anything that comes along. One of these systems will almost definitely gain traction, and then the bet will pay off.


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