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Small Businesses Not Ready For Anti-Fraud EMV Credit Cards

August 25, 2015 by Gary Stockton

Liability-Shift

Credit card companies have been making a big push toward solving the problem of duplicate debit and credit card fraud by introducing high-tech “EMV” credit cards. EMV which stands for Europay, MasterCard and Visa, is a global standard for credit cards equipped with computer chips and technology to authenticate chip-card transactions. While new credit cards still include the familiar magnetic strip, merchants with upgraded point of sale systems have started directing consumers to insert their card vs. swiping them at the checkout lines across the U.S.   

The new EMV cards have been steadily making their way to business owners and consumers for the past several months, with major U.S. retailers such as Walmart and Target rolling out upgraded point of sale systems to take advantage of the new technology. But according to a recent Intuit survey titled “Small Business Adoption of EMV Technology”, most small businesses are still unaware of the new standard, and probably more alarming, are unaware of the bottom line implications of an important policy change being enacted by card companies and banks starting in October. 

 

Liability-Shift places responsibility squarely on the merchant

Starting on October 1, American Express, Discover, Maestro, MasterCard and Visa will relinquish liability for fraudulent transactions processed by merchants.  This is an important and significant change because previously merchants would typically not be held responsible for duplicate card or cloned card fraud transactions.  The new EMV cards are essentially impossible to duplicate, and as such, if a merchant has upgraded to an EMV compatible point of sale system, they should be asking customers to “dip” their card into the terminal instead of “swipe” as we have typically done in the past. Chip cards generate a unique one-time code every time they’re used in-store at a chip-activated terminal. This feature is virtually impossible to duplicate in counterfeit cards, helping to reduce in-store fraud.  

Awareness of new EMV standard not widespread

According to the Intuit study, just under one-in-five (19 percent) of small businesses surveyed claimed to be aware of the October 2015 deadline for adopting EMV compatible point of sale systems. This leaves a staggering 81 percent of small businesses surveyed unaware. Fifty eight percent of business owners with fewer than five employees have never heard of any deadline.

Majority of small business owners not committed to EMV-compatible systems

When asked whether or not they intend to upgrade to EMV-compatible systems by the October 2015 liability shift, nearly half of those surveyed, 48 percent were unsure and had not decided, and 10 percent had decided they were not going to upgrade at all. The cost of upgrading to a new POS (point of sale) terminal appears to be the primary issue with nearly six-in-ten (57 percent) indicating that the cost of the terminal is the primary reason they were not considering upgrading by the October deadline.  Eighty-five percent of small business owners who will not migrate to an EMV compatible system were unaware of the financial and legal liabilities they will be responsible for come October 2015. So this leaves a troubling scenario for small businesses in the fourth quarter, one that will potentially expose them to high fraud and legal costs as fraudsters take one final run at counterfeit and lost credit card fraud schemes before EMV starts to take hold in the U.S.

Half of small businesses not prepared for additional burden

Another revealing finding in the Intuit study was the high percentage of small businesses, 50 percent indicated they were not prepared to handle the financial and legal costs associated with fraudulent credit card transactions after October 1. Most major U.S. retailers have been upgrading POS terminals, but seven-in-ten (70%) of small business retailers spend less than $200 per year on their POS system. This policy change just might be the thing that forces many small businesses to make more significant investments in that area. 

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As EMV addresses some fraud, the rate of Card Not Present (CNP) expected to go up

According to a report from Aite titled “Card-Not-Present Fraud in a Post-EMW Environment: Combating the Fraud Spike”, when EMV rolled out in Canada, counterfeit and lost/stolen card fraud enjoyed a 54 percent decline between the inception of the migration from 2008 through the present. Conversely, CNP fraud jumped 133 percent over the same period.  Also, when EMV deployed to merchants in the United Kingdom, CNP fraud grew by 79 percent between 2005 and 2008. Despite EMV’s ability to mitigate counterfeit or stolen card fraud, history has shown that fraudsters will find new ways to commit fraud and try to exploit weaknesses or cracks in the credit economy.

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As the October deadline approaches, card companies have been putting additional resources in place to educate merchants and consumers, and major media outlets have been starting to talk about it more, so hopefully small business antennas will go up, and they migrate to the new EMV-compatible terminals rather than face fraud liability.

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