The Latest Assaults on Card Fees

The Latest Assaults on Card Fees
I said last year that I can’t really take a summer vacation – too many things seem to happen in payments while I am away. This year was no different with many interesting stories to catch up with from new chiefs at MCX and Visa Europe to PayPal trying out check-in payments in the UK to the latest announcements from Isis (I will try to review those in a separate blog.) However, two big news items really caught my eye, both to do with further assaults by regulators on card interchange fees. As Gareth already described in his blog, the European Commission confirmed its intentions to cap interchange fees across Europe to 0.2% for debit and 0.3% for credit. The enactment is expected to take one to three years for European Parliamentary approval and approval by a majority of EU member states. Caps will start applying to cross-border transactions two months after final approval and for domestic transactions after 24 months, so some of the caps could be introduced as early as late 2014. If and when this happens, it will have major repercussions to the industry – the banks will have to seriously question the viability of offering credit cards, are likely to be more open to experimenting with non card-based solutions (e.g. bank account), yet the merchants incentives to accept anything other than cards and card-based solutions would be seriously diminished, dampening the prospects of innovation and start-ups. If the EC announcement was expected, the news from the US was anything but. While the industry was still getting to grips with the aftermath of Durbin amendment, the District Court Judge Richard Leon threw out the $0.21 debit interchange fee cap set by the Federal Reserve and suggested that the Fed should review and lower the cap further. If the cap went down to $0.12 or even lower, the banks would stand to lose another $4bn or more in revenue. The Judge’s decision also appears to impose more routing requirements than the Fed’s ruling did, which even in the original implementation turned out to be a big stumbling block for EMV. What will this latest turn of events do for EMV prospects in the US? If there is one thing certain is that it will only create more uncertainty for the industry, making the original dates for the liability shift even more difficult to achieve.

US Merchants Remain Unconvinced by EMV

US Merchants Remain Unconvinced by EMV
I presented at the CARTES America conference in Las Vegas last week. It was a great event with many interesting conference sessions and good opportunities to network. One of the highlights for me was the opening keynote with panelists representing various merchant organisations, such as Merchant Advisory Group (MRA), National Restaurant Asociation (NRA) and The Association for Convenience and Fuel Retailing (NACS). The message was pretty clear – merchants are not convinced about EMV, certainly not in its present form. At the very least, they have genuine concerns about costs, some of the decisions to-date and the issues that remain unresolved:
  • According to the panelists, “even if the fraud rates were to double to 8bps, that is still not enough to cover capital expenditure paid over 30 years,” the “ROI is just impossible.” While it is easy to dismiss merchant cost concerns as bargaining, merchants are not looking just at the cost of terminal replacement. For example, apparently many US fuel stations today do not have sufficient bandwidth for EMV transactions, which means ripping off and upgrading station forecourts. And while that in itself is expensive, many such changes would require certifications and approvals from Environmental Protection Agency (EPA) further escalating the costs.
  • Merchant training is also likely to be a significant undertaking – “smaller members don’t know what the letters (EMV) even stand for”, they are “behind on education.”
  • Merchants are concerned about the decision not to go uniformly for Chip and PIN. In their view, the continued presence of signature as a cardholder verification mechanism only confuses the market.
  • Rightly or wrongly, they are also concerned about the chip being a “property of a few stakeholders” and what it means to them in terms of transaction visibility. “We will not buy information back from the issuers about our customers.”
  • Also, ambiguity on Durbin stifles progress by merchants. While the panelists described Durbin amendment as “the most significant positive change for merchants”, the requirements to have two unafilliated network applications on the same card complicate EMV implementation for debit cards.
At worst, some seem to view EMV as yet another conspiracy of banks and card schemes against merchants. As one panelist described the situation: “Liability for signature transactions in brick-and-mortar environment today are with the issuers, while we (merchants) pay premium for the e-commerce transactions. With EMV, you are now transferring the liability to us for brick-and-mortar transactions (assuming merchants don’t migrate to chip), while doing nothing to solve e-commerce issues. And as we know, with EMV, fraud migrates to e-commerce, so we are getting hit twice.” So what does it all mean? It is very likely that 2015 deadlines will not be met. Or in other words, the merchants will not be ready and if the issuers are, the merchants will be hit by the liability shift. As I understood, if merchants had their way, they would:
  • Get rid of signature and move to a “common customer experience around the world”, i.e. Chip & PIN;
  • Get rid of PCI, or at least reduce the scope;
  • Get interchange relief or help with terminalisation;
  • Solve e-commerce.
Banks and schemes can agree or disagree with these positions. What is important is that there is a dialogue and all parties are involved. Merchants are a crucial constituent in the payments equation and their voice has to be heard. I know merchants are already active participants in key forums (e.g. EMV Migration Forum), and they should continue to collaborate with the industry to find the best solutions for the market.

Applauding Visa’s Plans to Accelerate EMV Adoption in the US

Applauding Visa’s Plans to Accelerate EMV Adoption in the US
Yesterday Visa announced its plans to accelerate EMV adoption in the US. A confluence of factors, such as some of the US merchants and issuers making independent moves towards EMV, as well as accelerating developments around mobile payments, helped Visa decide that the time to act is now. It is the first time that a major cards network has thrown its weight behind the EMV debate in the US, and I think it is a very important development. For those of us in Europe already used to EMV, the announcement had a number of familiar tactics and incentives to ignite the industry-wide migration, such as:
  • Expanding the Technology Innovation Program (TIP) to Merchants in the U.S. effective October 1, 2012. TIP eliminates the requirement for eligible merchants to annually validate their compliance with the PCI Data Security Standard for any year in which at least 75 percent of the merchant’s Visa transactions originate from chip-enabled terminals;
  • Establishing a Counterfeit Fraud Liability Shift for domestic and cross-border counterfeit card-present point-of-sale (POS) transactions, effective October 1, 2015 with fuel-selling merchants given an additional two years to comply.
However, there were some very important differences:
  • Visa is not forcing the US to migrate to Chip and PIN, a standard currently used in Europe. Instead, the migration to chip is intended to lay the foundation for dynamic customer authentication. While PIN is undoubtedly more secure than signature, both tools suffer from being static authentication methods, which, if compromised, will lead to security breaches. Dynamic authentication means that new data is generated for every transaction, making it less valuable to steal card data and thus boosting security. Visa re-iterated its intent to support signature and PIN authentication methods globally, but also stated its expectations that their use will diminish over time and be replaced by dynamic authentication technologies.
  • Visa insists on the rollout of terminals able to support both contact and contactless chip acceptance, including NFC-based mobile payments. In fact, unlike in Europe, only such terminals will qualify for the TIP incentive. By doing so, Visa creates the conditions to solve the “chicken part” of the “chicken and egg” connundrum of NFC mobile payments.
In my opinion, Visa should be applauded for:
  • asserting industry leadership;
  • thinking strategically and proposing a pragmatic and forward-looking solution;
  • proposing specific and realistic dates (SEPA rule-makers, take note!)
  • creating incentives for the migration to happen.
Nevertheless, I suspect this will generate a lot of debate in the industry. No doubt, some will argue that given the economic uncertainty and Durbin implementation, the industry already has enough on its hands at the moment. What do you think? Will Visa’s decision be enough to move the needle? How will the issuers, merchants and the other schemes react?