The U.S. is lagging ever further behind the rest of the world in EMV adoption. The cost of EMV migration is high – for the U.S. it has been estimated at between $5 and 13 billion. But the risks associated with delaying migration are growing, and without EMV deployment the U.S. payments industry could be hit with two major impacts. First, counterfeit fraud in the U.S. will rise as EMV chip cards continue to replace magstripe-only cards. Second, cross-border revenue will decline as fewer merchants in EMV-mature countries accept cards that are not EMV compliant.
Issuers can mitigate against these impacts with a combination of EMV card deployment and the global payment brands’ liability shift policies, which mainly come into effect in 2015.
Counterfeit Card Fraud
A MasterCard Advisors study showed that once EMV transaction penetration reaches 60 percent – as several markets in Europe, Asia, and Latin America have – counterfeit card fraud tends to decline. Beneath that threshold, fraudsters can find sufficient opportunities within their own borders, but above it, they may look for opportunities in other countries with lower EMV penetration. Many economies, including Brazil and Australia, will likely reach this 60 percent threshold in the next couple of years, and the U.S. is very likely to feel the effects. As counterfeit fraud increases in the U.S., it will tend to focus on the issuers who have not migrated to EMV.
This risk alone brings two clear messages to U.S. issuers: EMV is a question of ‘when’, not ‘if,’ and the issuers who deploy late will be hit with disproportionately high levels of fraud loss.
The Cross-Border Risks
In the past, global issuers struggled to make a convincing enough case for EMV migration to happen in a free market context – so several of the earliest migrations were driven by government mandate. That’s all changed now, as the benefits of EMV use have become clearer over time. Many countries are moving easily toward EMV migration now, leaving the U.S. behind in terms of payment options and fraud protection.
How this plays out for U.S. issuers and consumers is that Americans traveling to these EMV-strong countries are beginning to find that some merchants are refusing to accept their magstripe-only cards. While the number of these refusals is relatively small, the impact of refusal on issuers’ revenue can be much greater: cards can be put to the back of the wallet, as travelers revert to cash or other cards.
These two impacts provide a strong case for EMV deployment in their own right, but there are other drivers as well.
EMV Is Where the Rubber Meets the Road for NFC and Mobile
Migration to EMV has an added longer-term benefit that speaks to the rapidly-growing mobile payments market. EMV technology is a core component of NFC (near field communications) mobile payments, and can be viewed as a prerequisite for NFC mobile payment adoption. By adopting EMV, much of the work that’s required for NFC-enablement is already out of the way -- notably the dynamic authentication upon which both technologies are based. The likelihood of an NFC-enabled payments market emerging is much greater as prevalence of NFC-enabled smartphones and contactless POS terminals grows. Although it’s impossible to predict when the NFC opportunity will emerge, it’s also a question of when, not if. If it emerges very quickly, latecomers to the NFC party may find market entry very difficult, or prohibitively expensive.
EMV carries the further benefits of protecting against lost and stolen fraud through the use of PIN rather than signature for verifying the identity of cardholders, and driving cardholder value. MasterCard analysis indicates that these enhanced security features lead to increased confidence in using the card. Customers who particularly value security could seek EMV cards from other issuers – a further risk of non-adoption.
In a study based on a fictitious bank with 5 million cardholders and average market characteristics, MasterCard Advisors estimated losses could be as high as $25 million if EMV migration is delayed until 2015, rather than starting in 2013. It’s clear that there is the potential to significantly reduce losses and take advantage of added benefits by migrating to EMV sooner rather than later.
All U.S. issuers should prioritize EMV migration into their strategic planning and risk management assessments. The plan of action will be unique to each issuer, but whether the U.S. comes on board now or later could mean the difference between winning and losing in a rapidly changing marketplace.
Mark Rennie Davis is a Principal at MasterCard Advisors, the professional services arm of MasterCard Worldwide.