JPMorgan Takes on Wells Fargo in Race for Chip and PIN Credit Cards

Suddenly it looks like everyone wants to bring chip and PIN credit cards to Americans, even though we can’t even use them in the U.S. Yesterday we wrote about Wells Fargo’s pilot program, which will furnish 15,000 of the San Francisco-based customers with an EMV type of card that will actually work in Europe and elsewhere. Only a day after Wells let out the news, JPMorgan Chase is telling us that they will beat their rivals to the punch and be the first to issue smart cards to Americans.

I don’t think it will be a stretch to assume that the other big issuers will quickly follow suit. It’s a type of industry where no one wants to be seen as lagging behind their rivals, whether the contested service has real merits or not. I’m not saying that chip and PIN cards have no merit, far from it. But why is everyone jumping on them right now? Is it just the latest fad that will pass soon enough? Is it a prelude to the adoption of the technology across the U.S.?

Why Are U.S. Banks Suddenly Interested in Chip and PIN Credit Cards?

I don’t think that the sudden EMV craze is a fad, nor do I think that it presages the spread of the technology across the U.S. anytime soon. The answer is more prosaic and it has to do with lost revenue.

The incompatibility of standard mag-stripe U.S. credit cards with many point-of-sale (POS) devices abroad is costing U.S. issuers a lot of money. According to a widely quoted report by Boston-based Aite Group, in 2008 U.S. card issuers lost $3.9 billion in overall transaction volume and $447 million in revenues, because 9.7 million American cardholders were unable to use their cards abroad.

Moreover, Americans blame the card issuers for the inconvenience, according to the report. Then consumers change their spending behavior in ways totally unacceptable to issuers. Here is how Nick Holland, one of the authors of the report, describes it:

Nearly two-thirds of cardholders adjust payment behavior after a bad experience, directly resulting in lower usage of the problem card… An issue caused by incompatible card technology is treated far more seriously by cardholders than issues stemming from card acceptance, fees or merchant policies. A quarter of cardholders experiencing these types of problems will agree either somewhat or totally that the problem ruined or almost ruined their trip.

Now you might start asking what took them so long.

Who Will Get the EMV Cards?

Wells Fargo will issue 15,000 EMV cards to “consumer credit card customers who travel internationally.” The bank did not specify how they will select these customers, but one way to do that would be to check the customer service records for complaints with issues using cards abroad. Or they could send invitations to cardholders who have called before leaving on a foreign trip to alert the issuer of their travel plans and avoid their cards being shut down due to suspicious activity

JPMorgan Chase‘s approach is different. The New York-based bank is going after the highest-spending customers, according to Bloomberg. The first EMV cards will be issued by June to owners of the?áJPMorgan Palladium credit card, which has a $595 annual fee. Later the technology will be offered to lower-value customers.

The Credit Card Takeaway

So why did it take U.S. card issuers so long to start doing something about this issue? After all, the Aite report was released in October of 2009, not to mention the tons of complaints issuers must have been getting even before that. There is no doubt that U.S. issuers have known for years that they were losing money on lost foreign transactions.

Well, perhaps at first the losses were too small to provoke a response. Plus, times were good and issuers were enjoying bumper profits anyway. Then the financial meltdown struck and banks shifted into a crisis management mode, so new product development was not exactly a priority.

Whatever the reasons, however, it is clear that banks have now resolved to get this issue handled and that is a good thing. Personally, I would be happy to have my current Chase card replaced with one that, in addition to the magnetic stripe, has a chip implanted in it, so that I can use it anywhere. Oh, and if Chase drops the 3 percent foreign transaction fee, that would be even better.

Image credit: Wikimedia Commons.