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The Green Sheet Online Edition

December 12, 2016 • Issue 16:12:01

Insider's report on payments:
The travails of chip and debit cards

By Patti Murphy
ProScribes Inc.

Fourteen months into life under EMV (Europay, Mastercard and Visa), and the security protocol is far from universal at merchant checkouts, to the frustration of many. As a consumer, I'm frustrated. Some merchants I frequent have EMV readers installed, but still want me to swipe my card. Then there is the confusing messaging at EMV-enabled terminals. One especially perplexing message asks the cardholder if the transaction should be treated as "Visa Debit" or "US Debit." Huh?

I've been in the payments space for a long time, and I've spent at least half that time covering card payments, yet I mentally stumble whenever I see that prompt. I'm not alone. Not long ago I overheard a harried shopper say to a cashier, "But my card is Mastercard."

Merchants and the folks running debit card networks are frustrated, too. They have complained the prompts, specified under the Visa Selection of Payment Rule, deny merchant choice over processing networks and undermine competition in violation of Federal Reserve Regulation II, which implements the Durbin Amendment to the 2010 Dodd-Frank Act.

Visa insisted it wasn't trying to force merchants to route debit card payments through its network, but several merchants countered that the wording in their acceptance contracts suggested otherwise.

In November 2016, the Fed updated its commentary on Reg II, clarifying that no payment network can directly or indirectly inhibit merchant routing choices, including through technical specifications. The Federal Trade Commission also contacted Visa about its controversial routing rule, and a group of trade associations representing retailers wrote Visa's management demanding "immediate steps" to bring the rules into conformance with Reg II.

Before the month was out, Visa published a public letter explaining that network routing provisions in its EMV rules do not apply to "regulated U.S. debit transactions." So much for that problem, but it's not apt to open the floodgates to merchant adoption of EMV.

Delays in EMV implementation

EMV is a globally accepted security protocol named for the companies that developed it: Europay, Mastercard and Visa. It covers chips embedded in credit and debit cards and POS devices that accept the cards. Under edicts handed down by Mastercard and Visa, most U.S. merchants were expected to have EMV compliant terminals in place by October 2015. (Petroleum dealers with card-accepting fuel pumps were given additional time to comply.)

Most consumers now have credit and debit cards with embedded EMV chips. Visa reported in October 2016 that 388.8 million Visa chip cards are in Americans' wallets: 180.6 million credit cards and 208.3 million debit cards. Visa also reported 1.72 million U.S. merchants were accepting EMV chip cards as of October.

The top five states for merchant EMV adoption are New Jersey (48 percent of merchants there accept chip cards), Pennsylvania (44 percent), Florida (43 percent), and New York and California (43 percent each). U.S. merchants handled 771 million payments using Visa-branded chip cards during October, Visa said. The card company also reported that among EMV-compliant merchants losses to counterfeit card fraud were down 43 percent, compared with 2014.

Despite Visa's upbeat mood, merchant EMV compliance continues to lag. There are 27.6 million businesses operating in the United States, according to the U.S. Census Bureau. Various estimates put the total of card-accepting merchants in the United States at about 8 million. So using Visa's data, fewer than one in four U.S. merchants accepts EMV cards.

The Strawhecker Group reported in September 2016 that 44 percent of card-accepting merchants in the United States have EMV terminals; but just 29 percent can accept chip-card payments. Jared Drieling, Business Intelligence Manager at TSG, blames device manufacturers for the slow go.

"EMV terminal vendor supply and delays in the terminal activation/certification process are the bottlenecks in the migration," Drieling said. "It is important to note that EMV adoption by merchant industry can vary drastically, for example, quick service restaurants are suspected to be laggards in the transition." This could prove costly. Over 60 percent of noncompliant merchants studied by TSG earlier this year were experiencing increased chargebacks.

Lagging EMV adoption also has an impact on mobile payments adoption, notably mobile payment schemes that rely on near field communication (NFC) technology. NFC is the technology used to support contactless tap-and-go payments. It has been incorporated into all leading smartphones. NFC functionality also has been built into new EMV-compliant terminals.

Merchants, however, seem unaware their new terminals support NFC acceptance. "I don't think NFC has been explained to many merchants," Alexis King, Director of Partner Relations at National Merchants Association, said during a recent interview. Taking the time to explain this could make EMV more palatable.

Debit update

In related news, a new Fed report revealed that issuer costs are down and fraud is up. The Durbin Amendment requires the Fed to implement and monitor the impact of debit card interchange caps. A report issued on Nov. 30 – 2015 Interchange Fee Revenue, Covered Issuer Costs, and Covered Issuer and Merchant Fraud Losses Related to Debit Card Transactions – is the fourth Fed report issued on debit cards since capping debit interchange. That cap is 21 cents plus five basis points on the transaction total. Issuers that meet certain fraud prevention standards can add a penny to the charge. Small issuers (those with consolidated assets under $10 million) are exempt from the caps, as are government-administered payment programs and certain reloadable prepaid cards.

The Fed surveyed debit card networks as well as issuers for the report, collecting pricing and cost data from 2015. These are some of the metrics revealed:

  • Payment card networks processed 60.6 billion debit and general-purpose reloadable (GPR) prepaid debit card transactions valued at $2.31 trillion in the United States during 2015. Volume was up 6.8 percent over 2013.
  • Interchange fees across all debit and GPR cards (covered and exempt cards) totaled $18.41 billion in 2015.
  • The average interchange fee for covered transactions was 23 cents in 2015 and "has not changed materially" since the caps took hold in late 2011, the Fed said.
  • Card-not-present (CNP) transactions accounted for 14.5 percent of all debit and GPR prepaid card usage in 2015.
  • The average CNP transaction in 2015 was $70.76, which was more than twice the average card-present transaction.
  • Fraud losses from debit card payments totaled $2.41 billion in 2015, a 44 percent increase over 2013.
The Green Sheet, Inc.

Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. She is also the founder of InsideMicrofinance.com. Email her at patti@greensheet.com.

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