EMV, also known as “chip and PIN,” has been heralded as a panacea to fraud in the wake of high-profile breaches like those at Target and Home Depot, but with the October 2015 liability shift date fast approaching, are America’s community banks and credit unions ready to hit that deadline?
“Oh, not even close,” said Sarah Grotta, director of the debit advisory service at the Mercator Advisory Group in Maynard. “Even though we have some of the largest financial institutions issuing EMV debit now and on compressed timeframes, my prediction is we’ll see about 25 percent of the U.S. debit portfolio reissued with EMV by the end of 2015.”
In preparing her recent research note for Mercator, “Predictions for the U.S. Migration to EMV Debit Cards,” Grotta talked with various industry stakeholders about some of the barriers to EMV market saturation on the debit side and reasoned out that 25 percent figure.
According to EMVCo, 120 million chip cards were issued to U.S. consumers by the end of last year, but that accounts for just a fraction of the global picture. The organization estimates that as of December 2014, there were 3.4 billion chip cards in use worldwide, and in Western Europe, more than 96 percent of card-present transactions last year involved a chip card.
It’s important to distinguish between credit and debit here, too. Grotta focused only on the migration of the U.S. debit portfolio to EMV. She said the debit portfolio has lagged behind the credit portfolio where EMV reissuance is concerned – in no small part because of the Durbin Amendment, which required that all debit cards support at least two unaffiliated networks for merchants to use.
On top of that, she said, there just wasn’t much interest in EMV until the high-profile data breaches at Target, Home Depot and others toward the end of 2013.
Financial institutions – banks and credit unions alike – have followed no set formula to reissuance, either. Some bigger FIs have reissued cards en masse or on a compressed timeframe, while others have reissued cards with EMV on a natural reissue cycle and still others have taken a “wait and see” approach.
This latter approach may be the most common among community banks and smaller credit unions, already squeezed by rising costs of every stripe even before they turn their attention to EMV.
Grotta said many of those smaller financial institutions are sitting it out for now, hoping for costs to come down after the initial rush to meet the October deadline.
Hurdles remain on the merchant side of the equation, too. Very large retailers will likely have the awareness of EMV and the IT staff to get an in-house solution up and running, while small merchants, whose biggest obstacle may be lack of awareness of EMV, can purchase off-the-shelf solutions, Grotta said. The problem may lie with the mid-sized merchants, who are aware of the coming liability shift, but lack the deep IT staff to build their own solution.
Supply And Demand, Demand, Demand
Though market saturation of EMV debit cards may still be a year or more away, card manufacturers are nonetheless working round the clock to sate demand.
“There is far more demand than there is capacity,” said Gary Smythe, president of the Catalyst Card Co. Smythe, who has been in the card manufacturing business for more than 30 years now, said he saw an opportunity to serve the community bank and credit union market when he first learned of the migration to EMV. Now that the liability shift is just around the corner, he said, demand is far outstripping card manufacturers’ capacity.
Smythe sees two things happening: First, he describes “seriously extended lead times” that many manufacturers are quoting for card issuers – in some cases as long as 20 to 24 weeks – and second, he said he sees manufacturers actually outsourcing work to each other.
On the factory floor, there’s not much difference between an EMV credit card and an EMV debit card. The main cost complexity is the chip itself, Smythe said. The card manufacturer must keep down the spoilage rate because those chips are expensive and once the chip is installed, the manufacturer installs a virtual “key” that will lock the card until the entity personalizing the card (sometimes the manufacturer, which can add another level of complexity) receives it.
Still, for all the added complexities, Smythe puts his own estimate of the picture just a little bit higher than Grotta’s.
“I’m watching the work that we do and my gut is telling me it’ll probably be a little higher than that, maybe 35 percent,” he said. “Going out into mid-2016 we might be caught up to where credit is.”
