Small businesses slow in converting to EMV card readers

Merchants that don't meet Oct. 1, 2015, deadline liable for fraud losses


With a year to go before retailers hit a major deadline for upgrading their credit card machines at the checkout counter, experts warn that many merchants will not complete the switch in time. 

As a result, they are likely to find themselves suddenly liable for card-related fraud at their stores -- costs now incurred by banks. Small businesses are viewed as especially vulnerable to missing the Oct. 1, 2015, deadline to upgrade their card readers to accept microchipped credit cards using a more secure technology known as EMV.

EMV countdown begins
The EMV compliance race

With the deadline approaching for merchants to upgrade point-of-sale equipment, we look at how businesses are coping and what you can do to get ready.

"I don't think anybody is really ready for the EMV conversion," says Chuck Winter, an information technology specialist at global consulting firm North Highland. "There's certainly been a lack of focus on it. Merchants in general aren't seeing the cards coming into the shops yet, and there's a reluctance to put new technology in place until they see the demand." 

In addition, Winter says, many stores are underestimating the time and expense associated with the switch. It may involve more than just swapping card readers, because often a business's card readers tie in with other software. And because the new machines require customers to insert their cards into a slot rather than swipe them, businesses will have to train their clerks how to use the new equipment.

If too many retailers wait until the last minute to attempt to switch -- as now appears likely -- companies that sell the new EMV equipment will be unable to keep pace with demand. "They're underestimating the effort and the amount of time it takes to put a program together and get it deployed," Winter says.

The need to update credit card terminals at the checkout register comes as other card payment options appear poised to become popular. In September, Apple followed other phone-makers in announcing that its newest smartphones would come equipped with technology known as near-field communications (NFC), which allows consumers to pay by waving or tapping their phones on a compatible checkout terminal. Companies that sell card technology to retailers say shops already upgrading to EMV terminals should consider equipment that also supports NFC payments. (See "Preparing your business for EMV migration" for more tips.)

Playing catch-up
For years, EMV cards and card-reading technology have flourished outside the United States. For instance, in Europe, more than 80 percent of cards are enabled with EMV chips, and more than 95 percent of card readers are equipped for the technology, according to EMVCo, a consortium of card networks. 

The U.S., though, has stuck mainly with magnetic stripe cards. But that's about to change.

In 2012, the major card networks -- Visa, MasterCard, American Express and Discover -- announced plans for EMV adoption in the U.S. to discourage rising card fraud. Beginning Oct. 1, 2015, merchants will be responsible for fraud losses if they don't process chip-enabled credit cards at EMV card readers. The devices cost $400 to $700, but that amount can often be discounted if companies sign a contract with a payment processor. 

I don't think anybody is really ready for the EMV conversion.

-- Chuck Winter
IT specialist, North Highland

But banks have been slow to introduce chip-enabled cards. At the end of 2013, about 20 million of the 1.2 billion credit cards in U.S. circulation had been re-issued as EMV cards, according to the EMV Migration Forum, an industry group. That's less than 2 percent. EMV cards are expected to grow to 10 percent of cards at the end of 2014 and to 50 percent by the end of 2015.

Many small businesses, though, have not focused on the changes they will need to make. Even businesses that are thinking about it can have a hard time getting answers. 

Shannelle Armstrong-Fowler, owner and chief stylist at plus-size bridal boutique Haute & Co. in Chicago, says she has been unable to get consistent answers from her bank about what she will need to do to be ready for the switch. She doesn't know if the $210 fee she pays monthly for her current card terminal will rise, or if she will have to rent the equipment or buy it.

"For me, it's understanding what are the cost implications," she says. Since she knows her customers well, she's not too worried about fraud. But she wants to give her customers piece of mind when they're preparing for their weddings by buying dresses that start at $2,200 apiece. 

"It's all about the consumer experience," Armstrong-Fowler says. "Our brides, they have enough on their plate. The last thing they want to think about is their credit card getting hacked."

There are minor changes afoot for cardholders, too. They will likely be receiving new cards in the mail -- ones with EMV chips. The cards will still work at stores that do not have EMV card-readers. But if consumers use a chip card at an EMV terminal, they will have to become accustomed to inserting it, not swiping it, and in some cases they might have to enter a PIN. 

Weighing the risks
Small businesses might be lagging because they don't see a need. While major retailers such as Walmart and Target have EMV terminals in place, smaller retailers might not see the payoff in installing the new equipment because they don't perceive that they have problems with fraud.

"When they say, 'It won't happen to me,' part of our job is to educate them that they're not different from anybody else," says Steve Mathison, vice president of payment acceptance with payment processor First Data. 

There are tangible benefits to being an early adopter and having that behind you and knowing it's done, but there are also material risks to being late.

-- Steve Mathison
First Data

Another issue for small businesses is that as larger companies make customer payments more secure, fraudsters that usually scam mega-retailers could migrate to the smaller merchants whose systems remain more vulnerable.

"There are tangible benefits to being an early adopter and having that behind you and knowing it's done, but there are also material risks to being late," he says.

By the end of 2014, an estimated 5 million of the 12 million U.S. credit card terminals will be EMV-compatible, according to the EMV Migration Forum.

Forum director Randy Vanderhoof says he knows there will be plenty of businesses that won't make the switch by October 2015 -- probably smaller companies that plan just to wait until their existing card readers stop working or become obsolete.

And maybe for some retailers, he says, that's a risk that's worth taking.

"If you're the bait shop in Spearfish, Iowa, and you get the same 100 or 150 customers a year buying bait, the likelihood that you'll see a significant increase in fraud because of not accepting chip cards isn't that great," he says. "The more you have knowledge of your customer base, the lower the value of the average ticket item is, the less likely it is you'll be the place fraudsters go to commit counterfeit card fraud."

See related: 8 FAQs about the new EMV credit cards, How soon should retailers switch to EMV?, How can I protect my point-of-sale system against security breaches?

Published: October 1, 2014

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