The October 2015 deadline for EMV-compliant POS terminals and cards for the US has nearly arrived. Early estimates put total merchant compliance at just above 25%, with some not aware a conversion is required at all. Merchants that have not upgraded their POS terminals face a shift in the fraud liability that is traditionally covered by the card issuing institutions. EMV standards have been adopted internationally and have proven effective at reducing certain types of card fraud. This was not implemented earlier in the US due to the traditionally self-regulated nature of the payment space. Card fraud was highest in the US in terms of absolute value in 2015 (US$4.6 billion), but it is the eighth highest in terms of share of total card payment value of the 46 researched markets by Euromonitor International, with 0.09% of total card payment value lost in 2015. With such a small portion of merchants ready for the transition and only 11% of total cards in circulation updated, there may be a need to extend deadlines to increase awareness among merchants.
A long time coming
When we previously discussed the EMV transition in 2013, it seemed that both issuers and merchants had more than enough time to make the necessary upgrades. However, two years later, very few have actually adopted the technology to be considered compliant. Some estimates put the number of merchants that have upgraded terminals at between 20% and 30%. Most of the compliant merchants represent the largest retailers in the country, while many SMBs are unaware of the required transition or have not developed a strategy for updating. The total cost to upgrade a terminal can be anywhere between US$500 and US$1,000. For smaller merchants this amount can represent a sizeable operating cost. After 1 October, the fraud liability will shift to the merchants if they do not have the updated terminals. In some instances, the total fraud liability may not be greater than the initial cost of the terminal, further pushing merchants to delay upgrading. The initial estimates from 2013 to upgrade all the POS terminals in the US was around US$2.5 billion, but this has since been revised to US$6.8 billion in more recent estimates.
In addition to lowering overall fraud, upgraded terminals also allow for the acceptance of mobile proximity payments. An EMV-compliant terminal will also accept NFC payments, which is the technology behind the mobile payment platform of Apple Pay. Although still in the initial stages, NFC is the technology that some mobile payment platforms are developing around. However, this does not mean that it will be the only technology supporting mobile payments, further reducing merchants’ willingness to adopt it. In the US over the next five years mobile proximity payments are projected to increase by US$360 billion to US$525 billion in total. The majority of this value is expected to come from proximity payments made at a POS terminal by 2020. If the terminals are not updated, the merchant will not have access to this payment volume.
There are several benefits to upgrading for merchants, consumers and issuers. Given the absolute value of current fraud losses in the US, if the conversion to EMV can reduce the total value lost to fraud only by half, the transition would pay for itself in less than four years. However, encouraging merchants to upgrade by transferring a traditional issuer cost to them may create negative relations between merchants and the card networks. In extreme cases merchants may choose to revert to only accepting paper payments rather than taking on the additional fraud liability. Provided that the card networks and card issuers will benefit from greater card payments this outcome could be counterproductive. Providing a greater degree of education, information or extension of deadlines could be a more efficient method to prevent potential merchant backlash and ensure long-term adoption.