United States: A Primer On EMV Technology For Merchants

With the new year just around the corner, retailers should make a resolution to learn more about EMV technology.  That's because 2015 is slated to be the year EMV technology makes significant inroads in the United States, and retailers need to be prepared.  In this post, we answer some frequently asked questions about what the introduction of this new standard means for retailers and the steps they must take in order to prepare for the widespread adoption of this new technology.

What is EMV?

EMV is an acronym for EuroPay, Mastercard, and Visa, the three companies that developed the technology. EMV-enabled payment cards have embedded microchips that store the cardholder's information.  In contrast, most credit cards currently in use in the United States do not contain a microchip; instead, they have a magnetic stripe that stores information about the cardholder.  EMV is rapidly becoming the new worldwide payment card standard and has been widely adopted in many countries, particularly in Europe.

EMV cards may take a few different forms, most notably "chip-and-PIN" and "chip-and-signature."  In order to make a purchase using a chip-and-PIN card, the cardholder must insert his or her card into a card reader terminal and then enter a PIN known only to the cardholder.  Chip-and-signature cards, in contrast, allow the cardholder to sign their name (rather than entering a PIN) in order to complete a transaction.  Some EMV cards also have a magnetic stripe for use at merchants that do not have the equipment necessary to process a chip transaction.  In the United States, chip-and-signature-enabled cards are poised to become the more widely-used used form of EMV technology, with some card issuers already providing customers with chip-and-signature cards and other issuers planning to do so in the future.

What's the Difference Between a Card with a Chip and a Card with a Magnetic Stripe?

EMV's chip-based technology is thought to provide greater security than magnetic stripe technology, which explains its growing popularity worldwide.  One reason why embedded-chip-and-PIN cards provide more security lies in their multi-step authentication process.  In order to make a purchase using a chip-and-PIN card, the cardholder must insert his or her card into a card reader and then enter a PIN known only to the cardholder.  Requiring the cardholder to enter a PIN adds an extra layer of security, thus making the cards less susceptible to fraud.  In contrast, an individual who gets ahold of another person's magnetic stripe  or chip-and-signature card can simply sign the cardholder's name to make purchases.  

Magnetic stripe cards also are easier to counterfeit than chip-embedded cards, whether they be chip-and-pin or chip-and-signature.  Magnetic stripe cards can more easily be "skimmed" – that is, a counterfeiter can outfit an ATM machine or payment terminal with equipment that allows him or her to read cardholders' data off the magnetic stripe.  The information transmitted from the card is known as "static data" because it remains the same from transaction to transaction.  Once the counterfeiter harvests the static data by skimming it from a magnetic stripe card, he or she can use the data to create a counterfeit card that will be accepted in future transactions. 

Chip-embedded cards, however, are more difficult to counterfeit.  That's because chip-embedded cards employ a technology known as dynamic data authentication (DDA), which allows the microprocessors in the cards' chips to assign unique cryptograms to each transaction.  During the transaction, the transaction data – including data about the card – is sent to the card issuer along with the cryptogram.  The card issuer then uses the transaction data to generate its own cryptogram, and if the cryptograms match, the issuer allows the transaction to proceed.  This use of dynamic cryptographic technology makes it more difficult for counterfeiters to create counterfeit cards, since card data must be accompanied by a cryptogram that changes with each transaction.

This doesn't mean that chip-embedded cards are infallible, however.  Stolen EMV cards still may be used to complete transactions in environments in which no chip-reading authentication mechanism is provided, such as e-commerce-, phone-, or postal mail-based transactions.  Additionally, card thiefs could, at least theoretically, employ electronic devices to fool a payment terminal into accepting an incorrect PIN at the point of sale.  Moreover, EMV technology does not preclude the possibility of another major retailer data breach, since EMV technology does not prevent hackers from accessing unencrypted card information that either is in transmission or being stored by a merchant. 

What Do Retailers Need in Order to Support EMV Transactions?

As mentioned above, in order for a customer to complete a chip-based transaction using an EMV card, the retailer must have installed a card reader that can read the data contained on a card's chip and, in a chip-and-PIN environment, allow the customer to enter his or her secure PIN number.  A retailer may also offer a contactless card reader, which allows customers to simply tap their chip-embedded cards in order to make a payment . 

When Will This Standard Be Adopted in the U.S.?

2015 is slated to be a big year for EMV technology adoption in the U.S.  On October 17, President Obama signed an Executive Order mandating that certain government-issued payment cards be replaced by cards with "enhanced security features" (including EMV technology) beginning on January 1, 2015.  In perhaps an even more influential move, credit card companies have announced a major change in their agreements that will pin any liability for customer losses resulting from fraudulent transactions on retailers or banks that have not upgraded to EMV technology (see below).

What Are the Implications for Retailers and Card Issuers?

Although retailers will not be required to implement technology capable of handling EMV transactions, they will have a strong incentive to do so by the latter part of 2015.  October 2015 will see a "liability shift" in which, as between a retailer and card issuer, the party that does not support EMV will be held liable for credit card fraud.  For example, liability for a fraudulent transaction will fall on a retailer if the affected customer presented an EMV card for payment but resorted to the magnetic stripe on the card because the retailer did not have chip-embedded card readers.  Likewise, a customer's bank will be held liable for credit card fraud if the retailer in question offers chip-card reading terminals but the bank has not yet issued a chip-embedded card to the customer.   The "liability shift" will take place in October 2015 for retailers, and will come into effect for ATMs in October 2016 and automatic fuel dispensers (for example, at gas stations) in October 2017.

Payment card issuers also are offering incentives for retailers to upgrade to EMV technology.  Some card networks are waiving certain Payment Card Industry (PCI) data security standards for merchants that upgrade their systems.  For example, Visa is waiving the requirement that merchants confirm their compliance with the PCI standard if 75% of their Visa transactions occur at chip-reading payment terminals , and these terminals can accept contact, contactless, and near field communication contactless payments (the latter of which enables mobile contactless payments).  

In sum, whether merchants adopt EMV technology in mass or not, 2015 looks like it's going to be an important year for EMV in the United States.  With the new year rapidly approaching, merchants are evaluating whether to incur the costs of upgrading equipment to accept EMV cards, how that decision will impact the amount of fraud charges they are responsible for under their contracts with banks, and also how their decision will be viewed in the future in the event that they suffer a point-of-sale data breach.

A Primer On EMV Technology For Merchants

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