What will the future of payments look like in the United States? According to Visa, it'll look a lot like the current scheme in many other countries around the world, complete with EMV-based cards and payment terminals. EMV, the global standard for credit and debit card payments named after its original developers -- Europay, MasterCard and Visa -- features cards with embedded microprocessor chips that store and protect encrypted account user data.
In August, San Francisco-based Visa announced its intention to speed the adoption of EMV contact and contactless chip technology in the U.S., offering incentives to merchants and processors and the promise of increased card security to banks and other card issuers. The reaction of the financial industry to this latest push has been mixed, but experts seem to agree on one thing: The vision of EMV -- and payments in general -- in the U.S. is a bit cloudy.
The Promise of Security and Interoperability
One of the touted advantages of the EMV standard is a higher level of security compared with the magnetic stripe technology that most U.S. credit and debit cards currently employ. With its push for an EMV rollout, "Visa is looking to address the fact that mag stripes are inherently insecure," says Julie Conroy McNelley, senior analyst at Boston-based Aite Group's retail banking practice, who notes that EMV implementations throughout the world have been proven to reduce the type of fraud accomplished by copying customer account information that's encoded on a card's mag stripe.
The chip embedded in an EMV card is harder to crack than the mag stripe, asserts Eric Schindewolf, EMV product manager at San Francisco-based Wells Fargo ($1.3 trillion in assets). "While one could go through tremendous effort to try and break the code of a single card, all you have is a single card. It's not the same as having a mass compromise," he explains. "As a fraudster … you're looking to get many cards. With EMV you'd have to break each individual card, and that's no small feat. In that sense, EMV is extremely effective."
Adopting the EMV standard in the U.S. also could benefit international travelers, as it would create more card payment interoperability among countries. Some U.S. banks, including Wells Fargo, JPMorgan Chase and U.S. Bank, already have started issuing EMV-based cards to some customers who travel internationally.
"Three or four years ago, not having a U.S. EMV card didn't matter for traveling Americans. But over the last couple of years, there has been more and more impact," says David Porter, general manager of Chase card services at New York-based JPMorgan Chase ($2.9 trillion in assets). "That has led us to begin developing and introducing EMV chips on our card products."
Charlotte, N.C.-based Bank of America Merrill Lynch's commercial card group also will be issuing EMV-enabled cards to companies in the U.S. in early 2012. "We think that it is a natural evolution of the U.S. card market and one that will bring more global consistency," says Kevin Phalen, head of global card and comprehensive payables at Bank of America Merrill Lynch ($2.22 trillion in assets).
EMV Adoption Challenges
Despite its potential benefits, EMV faces challenges in the U.S. "We miss the mark when it comes to the security it brings to the market," says Dena Hamilton, detection and fraud expert at Guildford, U.K.-based intelligence solutions provider Detica, pointing out that the payment specification only reduces POS fraud. "When we talk about EMV, we overlook all of the other aspects of fraud. So we'll see the same challenges we're seeing in Europe right now -- other types of fraud are rising."
At the same time, Ben Knieff, security, compliance and fraud management expert and director of product marketing at New York-based Nice Actimize, says the shift away from POS fraud that can result from EMV adoption presents an opportunity for financial institutions to put more focus on security solutions for the card-not-present environment. But while banks largely will be able to leverage their existing payments infrastructures, they will have to evaluate and adjust their present security solutions in order to prepare for this opportunity. "They'll have to look at how agile and adaptable their solutions are and how ready they are to deal with a shift in the types of fraud that they see," Knieff notes.
Before the U.S. banks even get to that point, though, a number of steps toward EMV adoption still need to be taken, according to JPMorgan Chase's Porter. The process should start with a joint approach from Visa, MasterCard and Amex, he says, pointing out that Visa made its EMV announcement without support from the other card schemes. Next, nationwide standards and a deadline for conversion of all nonstandard terminals to chip-enabled terminals would need to be imposed, Porter adds, noting that the largest technology burden falls to merchants.
According to Aite's Conroy McNelley, however, getting the NFC terminal at the point of sale should be relatively easy. "It's a capital upgrade, but from a technology perspective it doesn't represent a sea change," she says. "The folks that will have the biggest challenge are the smaller merchants -- the folks who aren't typically as aggressive with terminal cycles."
Next Page: "A Bigger Challenge to EMV Adoption"
A bigger challenge may lie in getting the infrastructure in place to easily facilitate all of the loyalty aspects that could help drive EMV acceptance among consumers. "That engineering is significant," says Conroy McNelley. "Now you have to have communication between the payment device and the terminal and the cash register software to be able to recognize these discounts or incentives. That's a really big hurdle.
"To think that in four years, which is the deadline for the Visa EMV liability shift, we're going to have this robust payment structure in place along with the loyalty -- that's just crazy talk," she continues. "There's no way we're going to be there that soon."
From a bank perspective, just gaining an understanding of EMV across the organization is a major challenge, adds Wells Fargo's Schindewolf. "Many card-issuing banks are very large institutions -- we're involving fraud, marketing, disputes, banker trading, card ordering and more," he says. "There are a number of aspects that are touched by this, and getting people up to speed, as always in any large enterprise, has its challenges."
Complementary Payments Solutions?
Add to the EMV speculation all of the buzz surrounding mobile payment technologies such as Google (Mountain View, Calif.) Wallet or Square (San Francisco), and any vision of where payments are headed in the U.S. can become even fuzzier -- something JPMorgan's Porter calls "the payments swirl." "If we all knew what was going to emerge from this swirl of new payments, we'd all be putting our resources, time, energy and money into it," he says. "The fact that we're not means it's not clear."
Aite's Conroy McNelley says more than one type of payment likely will emerge from the so-called swirl because some technologies, particularly EMV and NFC-enabled mobile, easily complement each other. "I don't think this represents an either-or scenario," she explains. "The terminals that are required to facilitate mobile payments are the same type of terminals that are required for EMV. If people are deploying EMV to be in compliance with the Visa mandate, that will help speed the mobile payments process, and vice versa."
Bank of America Merrill Lynch's Phalen agrees. "We feel that NFC will be the next natural evolution in the card payments space and will occur concurrently with the issuance of chip and PIN," he says.
Mobile payments solutions could benefit from a shift to EMV, particularly if Visa's push to adopt both contact and contactless payment terminals catches on, according to Nice Actimize's Knieff. "It creates a really cool opportunity for issuers because, with contactless, you can start to look at all sorts of different form factors that aren't plastic cards," he comments.
But until the majority of customers become comfortable enough to ditch the plastic cards to which they've become so accustomed, EMV-enabled cards provide at the very least a transition away from the insecure mag stripe. "Folks can be overly optimistic about consumers' propensity to change their paying patterns. It's going to take some pretty significant changes and incentives to change consumer behavior," says Aite's Conroy McNelley, adding, "As long as we're stuck with cards, we should be making them more secure. And if we can make them more secure in a way that could potentially speed up mobile payments, then it's kind of a win-win situation."
For now, banks such as Wells Fargo are keeping a watchful eye on payment developments in the U.S. "We want to see how the domestic market unfolds," says Wells Fargo's Schindewolf. "If it begins to adopt EMV, we'll keep pace with the market."