During Discover’s first-quarter earnings call with analysts yesterday (April 21), CEO David Nelms offered something of a reality check on the coming EMV migration and liability shift.
“I think, more broadly, I expect that this is going to be a somewhat rocky rollout for the industry. This is a huge change for consumers, for people at point of sale. Consumers are going to have to start dipping their card instead of swiping it. Some merchants are going to be different,” Nelms said. “So I think that merchants, acquirers, issuers — we’re all going to be having to help educate consumers on the new way it works. And that’s what we saw in other places in the world where EMV rolled out. It took a while to smooth out the edges and fundamentally change things that’s been in place for a few decades.”
Regardless of the “rough edges” or “rocky start,” that EMV adoption may face, Nelms emphasized it’s going to take a collaborative effort on the part of the merchants, banks and issuers to move the industry forward together to help curb cybersecurity attacks.
“I think that it’s important that we all try and hit the October date. This has been a long time in the works. This has been a date that has been set quite some time ago, and as an industry we know we need to do something to better control security and fraud losses,” Nelms said. “And frankly, we could issue all the cards we want with chips, but if there are no terminals to use them it would actually cost us money — there would be zero fraud savings. I think it’s in the merchant’s best interest to get there — if anything, more than it is for the issuers when you look at some of the breaches that have happened.”
While issuers like Discover, Visa and MasterCard have all relayed reports about how they are ensuring consumers receive the upgraded EMV chip-enabled cards by the October deadline, Nelms’ point about the issuers not being the only player in the EMV game raises a valid concern. Without merchants and terminals to support EMV, the impact of issuing the chip-enabled cards is all for naught.
And the issuers aren’t the only ones who have something to lose. A recent report indicated that bankers are also miffed by the lack of merchants willing to upgrade to EMV. Banks are also becoming increasingly worried about the likelihood that they’ll be viewed as the culprit if merchants haven’t upgraded their POS systems to support EMV chip cards.
“I don’t want to see headlines saying, ‘Big Bad Bank Put Mom’s Pizza Shop Out Of Business’,” David Pollino, senior VP and enterprise fraud prevention officer at Bank of the West in San Francisco, told American Banker. “But it’s coming if merchants don’t take it seriously."
After Oct. 1, 2015 — which is less than six months away — any merchant that can’t accept EMV chip cards will be liable for the costs of fraud unless the issuing bank hasn’t upgraded the fraud victim’s card. Small businesses, in particular, have been a key target for banks and issuers to work with to ensure they have the resources and education to upgrade their POS terminals.
"For small restaurants in particular, margins are so low that to do capital expenditures, especially on something that is not broken, is not something they want to do,” National Restaurant Association general counsel David Matthews said in an interview.
And with card fraud expected to more than double by 2018 to $6.4 billion, there’s a lot at stake. MPD CEO Karen Webster recently sat down with Thomas Rand-Nash, Director of Operations at Brighterion, to discuss the impact on the industry. Over the course of this year, as the U.S. is the last G-20 country to enable the EMV standard, the largest U.S. credit card issuers will upgrade their credit cards. By the end of the year, Conroy said 70 percent of credit and 41 percent of debit cards will be EMV chip enabled.
As pointed out in a recent PYMNTS article, the majority of credit card issuers are going to market with chip and signature, not chip and PIN, as a method of verification. Issuers say that there are two driving factors of that – one is the fact that globally, it’s split. Sixty percent have gone PIN, whereas 40 percent have gone signature.
On the earnings side, Discover took a 7 percent dip in profit, as the company reported a net income of $586 million, which was down from last year’s Q1 figures of $631 million. On the revenue side, however, the company saw an increase from last year’s Q1 earnings figures of $2.08 billion to $2.2 billion in this year’s Q1.
Total payment loans volume hit $67.6 billion for the quarter, which was up 5.9 percent from 2014’s Q1. For card loans, Discover hit $53.5 billion last quarter, which was a 5.1 percent increase, year over year. Discount and interchange revenue was up 3 percent to $536 million, which was attributed to an increase in card sales. Overall, transaction volume fell 1 percent, year over year, to $50.2 billion. Discover card sales volume increased 2.7 percent from the prior year. Total Discover card volume hit roughly $28.7 million for the quarter, which just slightly above last year’s Q1. Discover card sales volume hit roughly $26.4 million for the quarter, up from last year’s Q1 of roughly $25.7 million.
While its transaction volume remained relatively flat on the quarter, Nelms said Discover is putting more of its attention toward travel rewards for its core customer base. He also spoke about increasing fraud protection for Discover It card members by allowing them to freeze their accounts instantly if a card is lost.
“We achieved solid loan growth and recently launched our new Discover It Miles card leveraging our strengths in rewards and service,” Nelms said in the company’s earnings statement.