Chip-enabled credit-card readers put rocky transition on retailers

30 Sep 2015 | Author: | No comments yet »

Card Liability Is Set to Shift.

Andy’s Toys owner Andy Tolch is eagerly watching his mail for delivery of a new Square credit card reader. Though the credit card industry’s self-imposed deadline is Thursday, more than six in 10 American card holders still don’t have chip-enabled credit cards in their wallets, and retailers are nowhere near ready, according to a new survey.

Only a fraction of U.S. payment card issuers have sent chip-embedded cards to customers, and only a fraction of merchants have installed chip-enabled payment systems as a deadline looms tomorrow to shift liability for fraudulent transactions from credit card companies.Thursday marks the deadline for US merchants and financial institutions to start making the transition to the new payment system, but most aren’t prepared for the switch to chips from magnetic stripes. Starting Thursday, merchants will be held fully liable for any losses due to credit card fraud if they are not geared up for the new, more secure, chip cards.

The EMV Migration Forum — EMV stands for Europay, MasterCard and Visa, the three companies that created the chip card standard — estimates 200 million-plus chip-enabled cards have been issued out of 1.2 billion cards in the marketplace. “There’s still a lot more cards to be updated to the chip technology for sure,” said Randy Vanderhoof, director of the forum, a multi-industry group. Analysts expect confusion and delays at checkout counters that could last into the holiday shopping season as customers look to dip, instead of swipe, and merchants contend with new machines to read the updated cards. Merchants are scrambling to deal Thursday with the end of a longtime policy in which financial institutions absorbed the cost of certain fraudulent credit-and-debit card transactions.

The cashier would stare at their credit card, not quite sure what to do. “Some younger cashiers would say: ‘I don’t know what to do with a card that doesn’t have a chip on it,’” says Oliver Manahan, vice-president of emerging payments at MasterCard Worldwide. On Thursday, credit and debit cards embedded with small rectangular microprocessor chips become the standard instead of cards with just magnetic strips. And consumers will need to change their habit of swiping their credit cards to pay: Instead, they “dip” their new cards into terminals and leave them there until the transaction is complete. The adoption of chip-enabled technology is a business decision rather than a mandate for card issuers and merchants, who must weigh the costs of issuing the new cards and installing the point-of-sale systems against the potential costs for fraud liability. But as of tomorrow, if a chip-enabled card is used for an unauthorized in-store transaction, the merchant will bear the liability if it was unable to process it as a chip card transaction.

Beginning Oct. 1, retailers that don’t have systems capable of reading the new chip-enabled cards will be stuck with the liability for some fraudulent transactions. Another estimate isn’t quite as dire: The Strawhecker Group, a management consulting company for the payments industry, found in a survey released Sept. 17 that 27% of merchants in the U.S. will be able to process chip-enabled cards by Oct. 1. Many customers of some of the largest banks in Massachusetts, including Citizens Financial Group, Eastern Bank, and Rockland Trust, don’t have the cards yet and may not get them until next year. “I would have expected to see more done,” said Michael Grillo, director of marketing for ACI Worldwide Inc., a Florida payments technology company with offices in Waltham. “There’s a lot of unreadiness. The details transmitted during the swipe of a traditional magnetic stripe card, such as the account number and expiration date, don’t change, so a thief using a skimmer on a payment machine can grab and then resell the information. And, even though card fraud constitutes more than a third of all card-related losses for the companies that issue payment cards, covering those losses is still largely manageable for the industry’s biggest players.

The new chip cards, which have been flooding consumer mailboxes for months, provide a unique code for each transaction, compared with static data that are contained on the traditional magnetic strip. Holly Cunningham, president and founder of Hollyberry Baking Co., spent time on the phone with her bank Tuesday to prepare for Thursday when she’s adding new equipment to accept chip cards at her catering business that includes a cafe on Manchester Road in Warson Woods. While the chip itself won’t stop thieves from hacking a merchant’s payment system, any stolen card information will be virtually useless since the data change each time it is used.

In recent years, a number of high-profile data breaches at companies such as Target have, sometimes overnight, resulted in a flood of fraudulent charges. “There’s nothing you can do right this moment to ratchet down fraud e-commerce without responding to every risky online transaction by rejecting it,” says David Robertson, publisher of the Nilson Report, which monitors the payments card industry. “But you do have the technology to guard against counterfeit card fraud. In addition, urban and suburban card holders are also more likely to have gotten updated cards than rural residents. “It’s a big, long process,” said Matt Schulz, senior analyst at “This is the biggest challenge in decades in how credit cards are used in America.” If you are among the 60% who haven’t got a new card, Schulz said there are two things you can do: Call your bank and ask when it’s coming, or apply for a new card.

If you put chip cards and terminals [in retail stores], you can really ratchet that down.” Compared with what consumers in Canada and elsewhere are used to, however, the new U.S. security standards are a half-measure. Her business hasn’t had any fraudulent transactions, but credit cards she uses for the business have been compromised four times in the past two months. Prepaid cards also are moving toward chip technology, but at a much slower rate because of a wider variety of offerings, lower value limits and less risk for merchants and card issuers, said Brian Riley, an executive at research firm CEB TowerGroup.

The answer, it seems, is fear of overwhelming the average American consumer, who uses between four and five credit cards. “Unless everybody’s all in with the pin system at once, the issuer who goes to pin in advance risks their customers not using the card because they can’t remember their pin,” Mr. The standard magnetic stripe cards will probably remain in circulation for years, said Seth Ruden, senior fraud consultant for the Americas at ACI Worldwide, a payment systems company. Full compliance on the merchant side won’t happen until 2017 when automated fuel dispensers are also required to have payment terminals that read the chip cards. US card issuers are primarily using a chip and signature system, in which the card is dipped into the reader, but the customer signs to authorize the charges. Retail trade associations worry that the burden of introducing the technology is falling disproportionately on stores, restaurants, and other businesses, but the chip-and-signature system is not as secure as chip-and-PIN. “They’ve locked the front door, but left the back door opened,” said Mallory Duncan, general counsel of the National Retail Federation in Washington, D.C., who called the approach “half-baked” in a conference call on Tuesday.

As such, getting all of them on board for chip-and-pin technology – which helps with stolen cards but is less useful in other areas, such as fraudulent online transactions – has been difficult. Companies that process payments for merchants are adding staff and training workers to deal with retailers that may be surprised to find themselves on the hook. Counterfeit cards represented $3 billion of the estimated $3.8 billion in fraud losses attributed to brick-and-mortar store transactions last year, according to Aite Group, a Boston-based consulting firm.

It says “most large retailers will have the new terminals running this fall.” Small and-midsize merchants may be particularly vulnerable because they have been slower to adopt the new technology.

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