The ever-worsening news from Target’s breach of credit card and customer data highlights the need to implement a more secure U.S. system to process our card payments.
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In recent articles, I have discussed ways to get around current vulnerabilities including one-time masked cards, or an upcoming card that relies on fingerprint technology. Over the longer term, many experts say the best solution may be the kind of ‘chip and PIN’ technology used in the rest of the world.
Europe introduced these so-called EMV cards, which take their name from Europay/MasterCard/Visa, in the 1990s. The cards contain a microchip that holds the sensitive credit card data in a much more hacker-resistant format than the magnetic stripes on U.S credit cards. There were 1.6 billion EMV cards worldwide accepted at 23.8 million terminals in the last quarter of 2012, according to EMV Co.
A world map shows only one dead zone when it comes to embracing EMV technology: the USA. Remote countries such as Bhutan, Bosnia and Iran all use it, as does every other country (yes, even North Korea).
In the meantime, the United States continues to suffer a rising tide of card fraud, adding up to $4 billion in bogus transactions in 2012, according to a Federal Reserve study released last month. That’s $8 in cheating for every $10,000 spent.
The Nilson Report, which follows the payments industry, reported last year that the United States is the only country where fraud continues to grow consistently, generating a quarter of all card transactions but 47 percent of fraud losses worldwide. The most visible fiasco was the hack on Target, which on Friday announced that its ongoing investigation has shown that the card breach has now impacted 70 million people (up from 40 million) who may also have had their mailing and email addresses and phone numbers stolen.
For Target, all this means that earnings could be 20 percent less than earlier forecast due to liability costs, reissuing cards, litigation and other expenses. On Monday it said it would spend $5 million to highlight cybersecurity threats. In recent days Neiman Marcus has also announced a possible breach of some of their card data.
So why then has the United States trailed even North Korea in beefing up its credit card system? It all comes down to money.
David Robertson, publisher of the Nilson Report, says EMV cards cost about $1.25 each, five times more than magnetic stripe cards. Multiply that by 1.5 billion U.S. cards now in circulation and you’re looking at $1.9 billion to replace all current U.S. cards. The 12 million device readers used by retailers each need about a $100 upgrade, although that cost would be lower for bulk purchases. He estimates this merchant upgrade cost at $5 to $7 billion, excluding some back office expenses.
“It will reduce fraud, but at what cost?” he says. “The other problematic part is the whole idea of a plastic card is really now relatively passé. It’s an old form factor, whether it has a chip in it or a magnetic stripe both. This world is clearly going toward wireless devices, clearly going towards smart phones.”
Still, that future transformation has yet to take hold. For now, U.S. EMV issuers face a chicken-and-egg problem, although sentiment is changing. “In the past year, the payments industry has seen a higher demand from merchants for EMV-enabled terminals in the U.S.,” says Elizabeth Crosta, vice president of public affairs at American Express.
Merchants will have a greater incentive to act by 2015, when credit card companies shift liability for fraud losses from issuers to merchants if they do not use EMV technology (gas stations have until 2017). But experts are unsure how widely EMV will be embraced even then. “I certainly don’t expect to see universal adoption of EMV technology by the 2015 liability shift date,” said John Postle, general manager of JHA Payment Processing Solutions. “Some merchants could determine the ROI just isn’t there.”
Some credit card companies already issue EMV chip and PIN cards, which are useful for Americans when abroad. For example, Wells Fargo, Chase and Bank of America offer EMV cards, although in many cases clients have to ask for them specifically. In September, American Express started issuing such cards for those who request them (except for Costco or Delta SkyMiles Amex cards).
Even wide U.S. adoption of EMV will not end fraud altogether. “One must keep in mind that as one door is closed on fraud, criminals will attempt to open another,” said Katie Allmaras, a spokeswoman for Discover, which operates the Discover and Diners Club cards. “In EMV markets, fraud typically shifts to the online or cross border channels.”
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