EMV - The Basics and What Businesses Need to do to Build Their Roadmap

For retailers, the days of putting concerns about EMV, or card-present, technologies on the back burner are over. If the term EMV means nothing to you, it’s time to get up to speed. If you’re aware of EMV but have done little or nothing to prepare for it, the time to act is now. Within the next year, retailers will start experiencing real consequences for not adopting EMV-capable technologies. To avoid such issues and to provide the best possible shopping experiences for your customers, it’s crucial to start prioritizing this important change, which is definitely on the horizon.

Say Goodbye to the Magnetic Stripe

Before delving into what EMV is and why it’s so important to develop a roadmap concerning it, it’s helpful to consider the deficiencies of standard magnetic-stripe credit and debit cards. Such cards have been the standard for nearly four decades – at least, that’s true in the United States. Elsewhere in the world, including more than 60 countries, magnetic-stripe cards have increasingly been replaced by smart-chip cards.

Why are magnetic stripe cards going the way of the do-do? The main issue concerns security. Such cards can be counterfeited quite easily. The equipment that’s needed to do it is cheap and easy to acquire. The problem is that magnetic stripe cards strictly store static information. This static information can be acquired through a process called “card skimming,” in which, unbeknownst to the cardholder, the machine doesn’t just grab the information for the transaction at hand. It also stores it so it can be used later for card-not-present transactions. This is precisely how online credit card fraud has become so rampant in recent years. Magnetic stripe cards are also highly susceptible to “card transplant” fraud, in which the stripe itself is copied onto a blank card, which can then be used in point-of-sale transactions.

What is EMV?

The limitations and downsides of magnetic stripe cards have been well-documented for years. EMV, which stands for EuroPay, MasterCard and Visa, is an entity that is owned by those and other credit card companies. It’s also the name that’s used to denote a set of standards and guidelines regarding smart chip technology, which is what differentiates EMV-compliant cards from magnetic stripe cards.

Unlike magnetic stripe cards, EMV-compliant cards don’t just store static information. Rather, they contain integrated circuit chips with microprocessors. These microchips store static information too, but they also transmit dynamic data that’s akin to a one-time password. The microchip on such a card attaches a unique cryptogram to each transaction, which dramatically enhances security. Even if a card is duplicated, it won’t contain the chip that’s necessary to attach the unique cryptogram, and it will therefore be rejected.

EMV Adoption

Global EMV specifications and standards were first developed and made available by EMVCo in 1996. They define the interoperable standards that are required not only for smart chip cards but for point-of-sale systems too. These standards also define specifications for the entire EMV infrastructure.

If EMV standards and specifications were developed so long ago, why are they only now becoming a major issue? In reality, that’s only been the case here in the United States. Elsewhere in the world – in Europe, in particular – EMV technology has been the standard for some time. According to EMVCo, in fact, the EMV adoption rate in Europe Zone 1, which includes all SEPA countries, is 73.9 percent. The adoption rate in Asia Pacific is 27.9 percent, and the rate in Canada, Latin America and the Caribbean is 31.2 percent. Meanwhile, firm data and numbers regarding adoption rates in the U.S. are unavailable. Why? Because EMV technology simply hasn’t been on card issuers’ or retailers’ radars. That’s about to change, though, and it’s time to get moving.

Why is EMV Adoption Suddenly So Urgent?

Retailers have been warned about the importance of adopting EMV-capable technologies for some time, but they’ve largely been able to push such warnings aside because they had no real incentive to do so. That’s all going to change in October 2015. At that point, many major card issuers will shift liability onto the shoulders of retailers who haven’t adopted EMV-capable point-of-sale (POS) systems. As it stands now, of course, credit card companies assume the vast majority of the liability when credit card fraud occurs. After October 2015, however, retailers who aren’t capable of supporting EMV standards will be on their own. Do you want to have to deal with sorting out various types of credit card fraud at your store? The answer has to be “no,” and the only way to avoid such an unhappy fate is by laying the groundwork for EMV adoption right away.

Benefits of EMV/Smart Chip Technology

Like many retailers, you may be confused about why there’s such a push toward EMV technology in the first place. After all, doesn’t the good old magnetic stripe worked perfectly fine? The truth is that EMV technology provides many crucial benefits. The U.S. is the last major holdout, but that’s changing imminently. If you’re not concerned about the upcoming deadline, which is in October 2015, perhaps the following benefits will sway you:

  •  Fraud Prevention – Fraudsters love magnetic-stripe cards. All they have to do is acquire the information from such a card, which is often as simple as “skimming” it using a standard credit card machine, and then use it in transactions that don’t require the card to be physically present. For instance, a clerk at a drugstore can use a simple skimming device to grab information from the magnetic stripe on the back of your card. He can then use that information online to make purchases. While additional layers of security are sometimes in place, including card verification value, or CVV, codes, they are fairly simple to sidestep. Smart-chip/EMV technology brings a whole other layer of security into the mix by attaching a unique cryptogram to each transaction. This results in a new form of authentication. Without the chip and the one-time password it creates, the required authentication can’t occur, and the fraudulent card or card information is rendered useless.
  •  Globalized Standards – If you’ve ever tried using a magnetic stripe credit or debit card in Europe, you know how frustrating it can be. Such cards are rarely accepted, so traveling overseas can be a logistical nightmare for U.S. visitors. The reverse is true too. Europeans who travel to the U.S. are often unable to use their smart-chip-enabled cards, which leads to serious problems. One of the top goals of EMVCo is to standardize the use of smart credit and debit cards to finally put an end to this problem. Once the U.S. gets fully on board with EMV standards, the days of having to find alternative payment options when traveling around the world will be over. As is commonly noted, global commerce is now the norm. Doesn’t it make sense for everyone to use the same credit and debit card technologies?
  •  Mobile Payments – Chances are that you’re already familiar with near-field communication, or NFC, technology. Some smartphones are NFC-capable, which means they can communicate with other devices from short distances away. NFC technology is poised to make mobile payments easier and more reliable than ever, and EMV cards work under similar principles. It is believed that once EMV becomes the standard in the U.S., mobile payments will explode in exciting new ways. For retailers like you, this is about more than just allowing people to make contactless payments; it will also open up the door to revenue-enhancing opportunities like integrated loyalty programs, marketing offers and many others.

How Smart Chip/EMV Technology Works

Smart chip credit and debit cards can communicate with POS systems and readers in two different ways. Contact cards have contact plates that transmit the necessary information when they are inserted into readers. These plates are usually gold and are typically located on the left side of the card. Contactless cards, on the other hand, contain antennas that allow them to communicate with readers via radio frequency technology. The antenna is not usually visible, but such cards usually have symbols on them to show that they are capable of contactless processing. There are also dual-interface cards that are capable of contact and contactless transactions.

EMV standards allow smart chip card transactions to be processed at POS systems in four different ways:

  •  Tap and Go – This method refers to contactless processing, in which the cardholder simply waves his or her card near the POS system or reader. No contact is needed; the smart chip sends the necessary information via radio frequency technology. This still results in very secure authentication, of course, but the cardholder isn’t asked to provide any additional information. Therefore, this method is most likely to be used for low-value transactions.
  •  Chip and PIN – As the name implies, this method involves waving or inserting the smart chip enabled card and providing a personal identification number, or PIN, to further authenticate the transaction. Until the PIN is provided, the card is held inside the reader. If the PIN is not provided, the card is rejected, and the transaction is denied.
  •  Chip and Signature – Once again, it’s fairly obvious what’s involved in this type of transaction. The card is waved or inserted, but a signature is also required for the transaction to be complete. This option most closely resembles what people in the U.S. are already use to, so odds are that it will be the one that’s adopted by the most retailers.
  •  Chip and Choice – In this case, the cardholder can decide whether to provide a PIN or a signature. Some people really loathe having to memorize PINs, so it’s wise to allow them to decide for themselves. Of course, having the ability to offer this option depends on the capabilities of the POS system that’s being used.

The Results are In: EMV Works

Because the U.S. has held off on adopting EMV standards and technologies, it’s easy to assume that they aren’t that great. Maybe the rest of the world is wrong, and we’re right? Nothing could be further from the truth. In reality, EMV technology has benefited overseas retailers in all kinds of ways. Most notable among them, however, is the effect that smart chip technology has had on fraud. We can look to the UK for an example.

The UK was one of the earliest adopters of EMV/smart chip technology, and we can look at the results there to see why the U.S. can stand to benefit from adopting it as well. Consider this: According to First Data, the adoption of chip and PIN EMV technology in the UK resulted in a drop in payment card fraud losses from 18 basis points to 12 basis points between 2001 and 2008. Between 2009 and 2010, fraudulent card activity dropped by 17 percent. Needless to say, these drops in fraudulent activity saved retailers and financial institutions untold amounts of money. Imagine how much could be saved when EMV becomes the true standard here in the United States.

To give you an idea, consider this: Per the Aite Group, card-related losses and fraud are increasing steadily from year to year. Currently, such activity costs the U.S. an estimated $8.6 billion per year. According to the Nilson Report, that number will increase to a $10-billion-per-year loss by 2015. It’s little wonder, then, that there’s so much pressure to have EMV technologies adopted by October 2015. It has to be the best way to stem the tide of these extremely expensive losses.

Costs of Implementing EMV Technology

Why has the U.S. been so reluctant to get on the EMV bandwagon? Not surprisingly, it mostly boils down to money. It’s ironic, though, when you consider how much money is lost per year due to fraudulent credit card activity. Still, the numbers regarding the costs behind fully implementing and standardizing the technology are sobering.

According to the best available estimates, there are more than 15 million POS devices in use in the United States. There are also more than 300,000 ATMs, nearly 610 million credit cards and more than 520 million debit cards. According to Javelin Strategy & Research, replacing all those POS devices with smart chip enabled devices would cost upwards of $6.75 billion. It would cost another $500 million to make the necessary upgrades to ATMs around the country and an additional $1.4 billion to issue new smart chip cards to replace magnetic-stripe cards. All told, then, the U.S. is looking at a total investment of at least $8 billion to get fully up to speed with EMV standards. Still, with fraudulent credit card activity costing the U.S. nearly $9 billion per year already and a forecasted $10 billion in 2015, such an investment would seem to be more than worth it.

What Does EMV Mean for Retailers?

Now that you know the basics about EMV, you’re probably wondering what the upcoming changes mean for you. Do you really have to do anything? Couldn’t you just wait it out to see if it will make a difference for you or not? Here’s the reality of the situation: In the not-too-distant future, you will face real consequences for not being able to process smart chip enabled credit and debit cards. Therefore, it’s crucial to develop an EMV roadmap right away. Such a roadmap will let you plot a course to ensure that you are able to get up to speed in time to avoid those unpleasant consequences.

October 2015 – Mark Your Calendar!

We can’t emphasize this point enough: Effective October 2015, many major credit card issuers will require retailers who haven’t adopted EMV standards to assume liability for fraudulent credit card transactions. Having to assume such liability will almost surely cost you more than upgrading your POS equipment would. In addition to costing you more in terms of dealing with losses, failing to adopt EMV standards will cost you a lot of time. You’ll be responsible for dealing with fraudulent activities. As it is, you hardly have time to manage your store. Talk about a logistical nightmare.

Upgrading and Replacing POS Devices and Systems

The sooner you’re able to accept and process smart chip enabled credit and debit cards, the better. How are you supposed to go about doing that? In most cases, all you’ll need is a new, separate PIN pad. However, it all depends on your current POS system and setup. The first step to figuring this out is checking with your current POS provider. Find out what kind of plan they have in place for the upcoming smart chip changes. If your POS provider doesn’t have a plan in place, you should consider switching to a different provider. If there is a plan in place, you should receive clear instructions about how to proceed, including the types of equipment you’ll need and the approximate cost of performing the necessary upgrades.

Embracing Mobile and NFC Payments

How mobile friendly are you right now? Are you able to accept mobile payments? That may seem more like a novelty currently, but the adoption of EMV standards is sure to change that quickly. As more people start using smart chip enabled cards, they’ll become more comfortable with mobile payments in general. EMV-compliant POS systems can typically accept mobile payments. Most are able to communicate with NFC-enabled smartphones, for instance, so you will be able to start accepting such payments as well. In a way, then, the upcoming EMV revolution will force many retailers into the future. One thing’s for sure: Consumers will start expecting to be able to use their mobile devices and contactless smart chip cards to pay. Retailers who can’t accommodate them will be left behind.

Which Payment Options should You Accept?

Sure, you are going to have to figure out how to upgrade your POS system and tackle other logistical challenges to get on board with EMV technology. At some point, however, you’ll also have to decide which types of payment options to accept. In fact, you need to give this plenty of thought before investigating EMV-compliant POS systems in earnest.

It is expected that most retailers will adopt chip and signature systems. People tend to be the most comfortable with them because they are so similar to current credit card processing technologies. However, as outlined previously, that’s not the only option. There are advantages to adopting a chip and PIN setup too and, of course, tag and go payments are sure to catch on and become popular in due course. With these points in mind, your best bet may be to adopt a chip and choice setup that puts customers in the driver’s seat.

Create Your EMV Roadmap Now

When it comes to EMV adoption and standardization, the clock has been ticking for some time. As a retailer, your first order of business should be the development of a detailed, time-sensitive EMV roadmap. Use it to outline the steps you’ll take to be in compliance by the time October 2015 rolls around. By having everything upgraded and ready to go ahead of time, you won’t be left scrambling when the axe finally drops.