When it comes to technology, the immortal Roseanne Roseannadanna had it right: It’s always something. When you think that some form of technology is working just fine, there is always something waiting in the wings ready to displace it.
So it goes with credit-card technology, as cards with embedded smart chips will soon render magnetic strips—and magnetic-strip swipes—obsolete.
Smart-chip technology is already firmly in place in many countries. But due in large part to the complexity of its banking system, the United States has been slow to follow suit.
That’s about to change. Smart-chip technology will roll out starting in October. As that happens, liability for credit-card fraud will begin to transfer from credit-card issuers to merchants. (For more, see “The Payments Revolution,” SAM May 2015.)
Most other countries have switched to chip cards because of the dramatically increased protection against fraud. Protection is all about encryption. Mag strips are minimally encrypted, using the same data for every transaction, and are fairly easy for counterfeiters to replicate.
Chips, on the other hand, contain integrated circuits that are discretely and complexly encrypted for each transaction, an infinitely more difficult challenge for counterfeiters to replicate. Chip cards are sometimes called EMV cards—shorthand for Europay MasterCard Visa—named for the standard adopted by all the major card issuers, and by which all compatible terminals can accept the cards. There are two systems in play: chip and signature methodology, and the more secure chip and personal identification number methodology—chip and PIN—which has been more universally adopted.
Counterfeiters focus on the U.S. because the mag strip technology makes it an easy target. According to Karen Cox, a vice president at Moneris, a global payment processor that has helped several Canadian resorts make the transition from mag strips to chips, credit-card fraud in the U.S. is now about $8.5 billion annually, roughly half of the world total.
So why hasn’t the U.S. walked in step with the rest of the chip-card world? A part of the reason is that customers, merchants, and banks have been comfortable with the mag-strip status quo. Complicating matters, however, is the fact that there are more than 10,000 financial institutions in the U.S. that issue credit cards. By comparison, in Canada, where the transition to chip cards is essentially complete, there are just five major banks.
In addition, both card issuers and merchants need to make significant software and hardware changes. For merchants, that means swapping out all point-of-sale credit-card terminals and updating software to make sure all transactions are read and recorded accurately.
Nonetheless, the U.S. is about to dive in. The October deadline in the U.S. is likely to nudge many merchants to make the transition sooner rather than later.
But how fast can the transition be made? In Canada, with its far smaller economy and far simpler banking structure, the changeover began in 2004 and it took six to eight years, Cox says. David Frick, president and co-founder of Transaction Resources, predicts that more-or-less full implementation will occur faster in the U.S.—by 2017 or 2018.
Smoothing the Way
The Canadian timeline might suggest the transition in the U.S. could be a mad scramble, but that’s not necessarily so. There’s now a well-defined road map to follow. Says Craig Minnett, IT manager for Glen Eden, Ontario, which completed the transition in 2011: “Americans will probably have a much easier time of it. We were kind of guinea pigs. Most of the glitches have been worked out.”
One lesson for U.S. resorts: Glen Eden facilitated the process by hiring experts to smooth the way. Accesso Siriusware, which specializes in payment and transaction software, assisted in what Marnie Piggot, Glen Eden’s director of financial and administrative services, calls “a major upgrade to our software package.”
There were a few bumps along the way. For one, the new PIN card terminals initially recorded all transactions, regardless of the card issuer, as Visa transactions. As Minnett says, “We did as much testing as we could, but we were early adopters, and you’re always going to come up with little bugs.” Accesso Siriusware quickly corrected any errata.
With roughly 30 point-of-sale locations at the time, it took Glen Eden about 20 hours to complete the hardware swap to chip-and-PIN machines. The cost, in new rental fees and termination fees, was not insignificant, but was amortized over several years. Cox estimates that the useful life of the terminal hardware is three to five years.
Finally, there was the cost of staff training. According to Piggot, it took “a good month before the staff became confident using it.” Glen Eden brought in Kubera, a payment processing consultant, to guide it through the complete process.
U.S. merchants can expect some issues as well. Frick says that, with the October deadline looming, there is effectively a “big traffic jam at the gateways” through which merchants connect with credit-card processors to certify that point-of-sale terminals meet EMV standards. Millions of point-of-sale terminals throughout the country will need to go through the certification process.
In addition, most ski areas operate as multiple sales entities, says Frick—ticketing, food and beverage, retail, lodging, etc. That makes the conversion far more complicated than for a small store with a single cash register and credit-card terminal. Since the conversion cost might run $500 to $1,000 per point of sale, Frick suggests ski resorts have important questions to ask: “Do I want to be at the leading edge, or do I want to see how this shakes out?” and “Will the EMV standard be good for five to 10 years?” It wouldn’t make much sense to convert to a system that becomes obsolete within a couple of years.
That’s why Sugarbush, Vt., is willing to take a wait-and-see approach. Kevin Babic, chief financial officer at Sugarbush, says, “We are not going to make the switch this fall, because the technology is not there yet. Our software vendors are actually scrambling to be compliant.” Too, not all cards in the U.S. have chips, meaning mag-strip swipes will still be required for many customers.
What about fraud? “We don’t have a lot of risk for fraud that would get passed on to us,” Babic says. Sugarbush is willing to take the chance of being exposed to a minimal fraud risk while waiting for all the pieces of the chip-card puzzle to fall into place.
The View Ahead
That said, chip cards are indisputably the way of the future. And while their emergence affects ski resorts mostly in on-property transactions, online payment services are also moving in the chip-and-PIN direction. PayPal recently introduced PayPal Here, allowing users to scan chip cards with mobile devices such as cellphones. Apple and Google are also moving to spur adoption of payment by cellphone.
The transition will inevitably take some getting used to, both by resorts and their customers. At a point of sale, a card must be inserted and left briefly in the terminal as the chip is read. For a chip-and-PIN (rather than chip-and-signature) system, a customer must enter a PIN. The process takes roughly twice as long as a mag-strip transaction. Terminals with so-called touch-and-go PIN pads, in which cards are simply touched to a chip-reading device, can expedite the process considerably. At Glen Eden, touch-and-go is used only for smaller transactions of, say, under $100, because touch-and-go lacks the extra level of security provided by PIN entry.
Whether it takes two years or five, chip card conversion is a future certainty. But it probably won’t be the last word in security. Cox, of Moneris, thinks that a distant future step could be biometric technology—fingerprint readers, for example. When it comes to technology, it’s always something.