The merchant-card network relationship can be complicated. It’s a complication that’s persisted long before EMV, but one that EMV seems to have intensified.
And it’s a complication that merchants now claim has cost them money in the form of chargebacks.
To help us get a better understanding of one card network’s point of view on this claim, as well as EMV’s evolution seven months in, Karen Webster recently spoke with Stephanie Ericksen, VP of Global Risk Products at Visa.
Here’s what they discussed.
The EMV Tipping Point
Let’s start with the basics, Ericksen told Webster.
"We announced the liability shift four-plus years in advance of the date in August 2011, knowing that much of the rest of the world had already invested in chip technology and that there were quite a few suppliers that had chip technology in their terminals and also chip capable card technology available," she said.” Ericksen also added that because the U.S. was one of the last countries to move to EMV, the costs of moving toward chip technology had gone down drastically for new merchants to acquire new terminals and existing merchants to upgrade.
But as we all know, it wasn’t until two-plus years after that announcement was made before the EMV catalyst hit payments: the breaches of major retailers like Target, Home Depot and Neiman Marcus. Whatever assumptions merchants had made about whether EMV would or would not be leapfrogged by other technology immediately vanished.
And, at that point, that four-year timeline became compressed.
Ericksen’s perspective is that the merchant breaches were not only the watershed moment for EMV, but also an important reality check that helped everyone in the payments ecosystem better understand how widespread the problem of data breaches already was.
Pre-Breach Vs. Post-Breach Attitude Shift
OK, so we are where we are, remarked Webster – seven months into the liability shift, with merchants still pushing back. Some of the claims merchants are making is that they invested in terminals in time for the liability shift but couldn’t get them certified, so ended up being caught now in a chargeback quagmire they believe isn’t their fault.
While there is always going to be the debate about if merchants weren't given enough time or if they were just late to the party, Ericksen said that there’s one aspect of the equation that can’t ever be overlooked: the complex nature of the payments ecosystem in the U.S. that had to be managed once merchants decided to really get behind EMV.
Ericksen cautioned that there was complexity in the U.S. environment that made it necessary to find ways to have the technology meet the needs of the U.S. environment – complexities that come with working across many players who all need to agree to a common way of doing things. “So whether it comes to supporting the common debit AID or having multi-network routing options available on the same card – that is one example of the new factors that all of us had to take into consideration in the U.S. that hadn't needed to be addressed elsewhere," Ericksen said.
For that reason, Visa licensed its technology for free to the other networks to accelerate the deployment, Ericksen noted.
That made it possible for merchants, for instance, to use the Visa chip application to route that transaction to any participating network on that card. Ericksen added, "There have been many things we've done to facilitate and enable the [EMV] technology.”
The Charge About Chargebacks
Now about those chargebacks, Webster asked. Big problem? New problem? Unique problem?
"The migration is going along much as you would expect in the early days of post-liability shift. As we've seen from other countries, counterfeit fraud often continued to go up post-liability shift until reaching a critical mass of chip-on-chip domestic payment volume," Ericksen told Webster.
Ericksen told Webster that at that point, a tipping point is reached and counterfeit fraud declines in the physical channel. Meanwhile, counterfeit fraud follows a rather predictable (and logical) path: from the EMV-enabled issuers to the non-EMV-enabled issuers, and from the EMV-enabled merchants to the non-EMV-enabled merchants.
Of course, the benefit of not being first to the EMV party is being able to study the fraud migration patterns in other markets post chip card shift. The biggest problem, at least on the merchant side, is that merchants didn't have liability for counterfeit fraud and therefore didn’t receive any chargebacks for this type of fraud, Ericksen said.
What Visa is doing now, Ericksen said, is monitoring chargebacks and working closely with issuers to remind them of the exact rules.
Ericksen described a situation that did include “invalid chargebacks” – where issuers attempt to incorrectly charge back a transaction. This is a situation that she says isn’t unique to EMV. When that happens, the acquirer and the merchant have, she explained, the opportunity to do what's called a re-presentment of the chargeback to the issuer – a normal interaction that happens today for all types of chargebacks. Ericksen also points out that the number of invalid counterfeit chargebacks have actually been quite low compared to what we've seen prior to chip or from other invalid chargebacks.
Where issuers actually have a chargeback right, Ericksen also says that she hasn’t seen any loosening of the controls for approvals and authorizations. “We've been monitoring that pre-liability shift and post liability shift, and it's been very steady," she noted.
What that means is that there hasn't been any evidence of a spike in approval rates on chip cards used at mag stripe terminals. In fact, it might be quite the opposite. What the data show is that chip cards used at mag stripe terminals are approved slightly less often than chip cards used at chip terminals, Ericksen said. Also, when issuers submit a counterfeit chargeback, they are required to close the account and re-issue the card, which is not a step that they take lightly, given the operational costs of re-issuance and the risk of losing cardholder preference.
The Bottom Line
From Visa’s perspective, Webster asked, how’s it really going? Webster pointed out that, based on the data, it appears the implementation of EMV is moving along at a fairly fast pace. Perhaps at a rate faster than many expected, even within the SMB merchant category.
"It's just getting better and better every month in terms of the number of merchant locations, and number of cards, and percentage of cards being issued, and the percentage of volume," Ericksen said.
Following peak season, she said, Visa's data is showing that there are roughly 23,000 new merchant locations on the EMV-enabled list per week.
"We've been seeing leaps and bounds if you consider that almost two-and-a-half times the number of merchant locations are enabled with EMV than were in September. Same thing on the card side. We've seen continual re-issuance and upgrades of the cards," she said. "It's actually happening at a pretty fast clip."
Making Faster, Faster
As fast as we are moving, we’re still a long way from the tipping point that Ericksen described, Webster pointed out, which will make the chargeback issue in the physical channel more of a moot point.
That's where Visa is trying to smooth and accelerate the transition, Ericksen emphasized.
"We’re certainly doing as much as we can to help streamline things for the industry to get up on chip as fast as possible — and then also provide interim measures for many of these merchants such as best practices on how they can protect themselves," she explained.
But in the end, what it comes down to — as do most things in payments — is balancing convenience and security. What that means, she said, is ensuring merchants aren't declining cardholders for good transactions, but being able to spot a potential fraud run that's out of pattern faster.
"We help fine tune controls and give merchants recommendations on how they can do that in their store systems as well if they aren't EMV enabled [and how they are] potentially liable for counterfeit fraud," Ericksen said.
And, as everyone in payments knows, that certainly takes a delicate balance.