EMV, NFC, Mobile Wallets and Credit Card Fraud Liability

EMV, NFC, Mobile Wallets and Credit Card Fraud Liability

Beginning in October 2015, merchants who have not upgraded to EMV-compliant point-of-sale (POS) terminals, will be liable for the full amount of any fraud losses incurred at their stores. That requirement is, of course, a big part of the push towards adoption of EMV (also known as chip-and-PIN) cards that the credit card networks have undertaken. And there is a good reason for it: EMV cards are much more secure than the magnetic-stripe-based ones that we have here in the States.

Incidentally, as NYT’s Joshua Brustein reminds us, this requirement is also a boon for mobile wallet operators like Google and Isis who have been “severely limited by a lack of N.F.C.-enabled merchants and phones.” The idea is that merchants are upgraded to new POS terminals that are both EMV- and NFC-compliant. Point-of-sale equipment manufacturers like VeriFone also stand to benefit in a huge way from the shift to new equipment and, of course, proponents of competing mobile payments technologies like Square and PayPal are telling everyone who would listen just how senseless this whole NFC thing is. But I’d like to add a couple of things that are missing from Brustein’s piece which, I think, will help you better understand exactly what is being done by the credit card networks and why.

Merchants to be Held Liable for Fraudulent Transactions

First, let’s see what Visa has decided on the fraud liability issue:

Visa intends to institute a U.S. liability shift for domestic and cross-border counterfeit card-present point-of-sale (POS) transactions, effective October 1, 2015. Fuel-selling merchants will have an additional two years, until October 1, 2017 before a liability shift takes effect for transactions generated from automated fuel dispensers. Currently, POS counterfeit fraud is largely absorbed by card issuers. With the liability shift, if a contact chip card is presented to a merchant that has not adopted, at minimum, contact chip terminals, liability for counterfeit fraud may shift to the merchant’s acquirer. The liability shift encourages chip adoption since any chip-on-chip transaction (chip card read by a chip terminal) provides the dynamic authentication data that helps to better protect all parties. The U.S. is the only country in the world that has not committed to either a domestic or cross-border liability shift associated with chip payments.

So the fraud liability will be shifting to the merchant’s acquirer (processor), not directly to the merchant. The processor may then pass it on to the merchant (it probably will), but that is a matter to be settled between the two parties.

Who Pays for Credit Card Fraud

Then there is the issue of paying for fraudulent transactions. Brustein makes it sound as if the merchants have so far been spared from fraud losses. Moreover, in the above statement Visa tells us that “POS counterfeit fraud is largely absorbed by card issuers.” In reality, however, merchants have been absorbing a quite substantial portion of all fraud losses incurred in the U.S., to the tune of 41 percent in 2006, according to Kansas City Fed economist Richard J. Sullivan.

EMV, NFC, Mobile Wallets and Credit Card Fraud Liability

As you see in the table above, most of the merchants’ fraud losses (59 percent) have come from POS transactions, which are the ones that are affected by Visa’s “liability shift” decision. So, while making non-EMV-compliant merchants liable for all fraudulent transactions does give them a huge push to adopt the new technology, it has to be kept in mind that merchants have not exactly been immune to fraud losses. The only participant in a bank card transaction that is fully protected against fraud losses is the cardholder.

The Takeaway

The bottom line is that a full-scale EMV adoption will take place in the next two to three years. Keep in mind that Visa has also mandated that all U.S. processors support merchant acceptance of chip transactions by April 1, 2013, less than a year from now. The big merchants will be the first to upgrade their terminals, most likely long before the deadline. By the time October 1, 2015 comes around the only stores that won’t be able to take a wave of your phone for payment will be small mom-and-pop operations whose owners will have not yet heard the news.

And yes, the mobile wallet operators do owe Visa and MasterCard a huge “thank you.”

Image credit: Clearpayfs.com.

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