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Issuers Hesitant to Outpace Merchants as US Transitions to EMV

March 23, 2015

(New York, NY):  While EMV migration efforts in the US are well underway, gaps in market readiness could lead banks to scale back the pace of implementation.

Fewer than one in ten credit cards in circulation were EMV-equipped as of mid-January, according to a survey of 20 issuers conducted by Auriemma Consulting Group (ACG). While that number is expected to increase sharply throughout 2015—issuers are targeting 50 to 60 percent penetration by October—projections are tied to large-scale advances in merchant acceptance that have yet to materialize.

“While the focus has clearly shifted to implementation and many banks have begun issuing EMV cards to new accounts, the pace of full portfolio conversion will be guided by the merchant rollout,” said Anita Solaman, Industry Roundtables Director at ACG. “Banks are hesitant to put chip cards in customers’ hands if retailers haven’t upgraded their terminals to process them.”

Such upgrades are critical to reaping the security benefits associated with EMV. Without compatible infrastructure at point of sale, transactions will fall back on the card’s magnetic stripe—which, like today, will lack protection against counterfeit card use. Reductions in that type of fraud, which has escalated rapidly following a string of high-profile data breaches and made EMV more attractive to issuers, will not be achieved until terminal coverage is ubiquitous.

Communicating enhanced cardholder security becomes a major challenge in a market with uneven acceptance. Patchy terminal support will also delay the learning curve for consumers: EMV migration will require cardholders to change familiar payment practices, and reinforcing the habit of dipping cards—rather than swiping them—will be more difficult if the experience varies by retailer.

“Slow merchant adoption introduces questions about cardholder communications, education initiatives, and general product awareness,” Solaman said. “Gaps in acceptance could confuse cardholders and weaken their perceptions of chip card security.”

Most projections for merchant acceptance center on October of this year, when the highly-publicized liability shift takes effect. After October, responsibility for counterfeit transactions transfers to merchants that have not upgraded to EMV-compliant hardware. While that date, imposed by the payment networks, has long been viewed as a tipping point for merchant adoption, many retailers still lack general awareness as it approaches. Others are skeptical that fraud will offset the cost of system upgrades.

“Large retailers are investing in chip-capable terminals, but readiness in the wider merchant community is likely overstated,” said Solaman. “The liability shift may not produce the quantum leap in acceptance many are expecting.”

Many banks have developed reissuance strategies that can be adjusted to keep pace with market conditions. Issuers will convert their portfolios through two basic methods: natural reissuance cycles, which will replace existing magstripe cards as they reach their normal expiration dates, and mass reissuance, which allows banks to more quickly transition large segments of customers to new cards. In the near term, as merchant acceptance ramps up, there is likely to be a greater reliance on standard replacement to match gradual increases in retailer readiness. In the event of more substantial shifts, some issuers have developed contingency plans to accelerate mass reissuance of remaining cards.

The volume of chip-on-chip transactions, or those involving EMV cards used at compliant terminals, is a critical metric to gauge acceptance patterns for chip cards already in the market. Issuers will be closely monitoring chip utilization rates, which have been low thus far, as well as magstripe fallback volumes. While banks are hesitant to outpace merchants, there are also clear risks associated with delaying migration, as fraud exposure on magstripe cards will increase as more EMV cards enter the market.

Despite concerns over the pace of the conversion to EMV, Solaman emphasized that the credit card industry has made major advances in short order to prepare.

“As recently as a year ago, many banks were still assessing the business case for chip cards, particularly because the technology only addresses physical transaction security,” Solaman said. “While the migration to chip cards may be gradual, it is now a question of when—rather than if.”

About Auriemma Consulting Group

ACG is a boutique management consulting firm with specialized focus on the Payments and Lending space.  We deliver actionable solutions and insights that add value to our clients’ business activities across a broad set of industry topics and disciplines.  Founded in 1984, ACG has grown from a one-man shop to a nearly 50-person firm with offices in New York and London.  For more information about ACG’s Industry Roundtables, please contact Tom LaMagna at 212-323-7000 or tom.lamagna@acg.net