Thursday, January 5, 2012

Smart Cards - Just Around the Corner

   Those of us old enough to have voted for or against George H. W. Bush for president may remember the anticipation 20 years ago over a technology that placed a small microcomputing chip right in a payment card. As that technology was adopted in Europe and other places we were told that those "smart" cards were coming our way. Right around the corner, we were told.

   I thought of that reading a lead story on the website this week. The article focused on   the release of a white paper on the implementation of EMV in the U.S. The paper was sponsored by Gemalto, a significant provider of EMV-compliant card solutions, with an assist by VeriFone, an equally significant provider of EMV- compliant POS solutions.

   Leaving the motivation behind the paper aside for a moment, it does provide some interesting insights into the EMV debate. Not the least of these are some suggested reasons the migration to smart cards and EMV will be different this time around, and by implication, why it's take so long to get here in the first place.

   Let me say from the outset: I have no horse in this race. I am neither a proponent nor an opponent of EMV, smart cards, NFC or mobile payments. Like most consumers, my bank sends me a card and I use it. I don't question the technology.

  What I do wonder, like most inquisitive people, is just who pays for all this new stuff. There's a great line in the Jerome Lawrence/Robert E. Lee play Inherit the Wind. Henry Drummond, the lawyer-protagonist, tells the jury in his summation, "Gentlemen, progress is never a bargain. You always have to pay for it." So assuming that EMV represents progress in payment systems, I wonder how it gets paid for.

   Give Gemalto props for a paper that brings together most of the salient points of the EMV discussion in one pretty tight package. Unfortunately, the paper blunts its main argument - that the stars are in alignment for EMV. It does so by relying on some less-than-dynamic logic. Such as the old chestnut that the American payment system is positively antediluvian. We're reminded time and again that "(m)ost of the world has fully migrated or is in the process of migrating to EMV chip technology..." Or, "(g)iven the prevalence of EMV chip technology in the rest of the world..." we lower primates here should get with the program, lest we keep scraping our knuckles on a worn path of magnetic-striped cards.

   I have relatives in Europe. When we get together I often quiz them about their banking and payment systems, from a consumer standpoint. Just to compare notes. Far from being a bunch of silverbacks, I think we do a pretty good job in payments over here.

   The Gemalto argument also relies too heavily on Visa's August 9, 2011 announcement of its carrot-and-stick approach to goose the adoption of EMV. The carrot is a merchant dispensation, beginning in October of this year, from having to validate compliance with the PCI Data Security Standard - provided three-quarters of a merchant's transactions originate from chip-enabled terminals.

   The stick is Visa's intention to shift liability for counterfeit fraud (in the case of a chip card presented for transaction to a merchant who has yet to install chip-reading terminals) from the card issuer to the merchant's acquirer. Ouch.

   But unless merchants upgrade their equipment to accept mobile contactless NFC payments as well as chip cards, they won't benefit from the carrot -  escaping the annual PCI compliance validation. So says veteran industry analyst Avivah Litan in another article. She also points out that even if merchant processors do get to go directly to GO and collect $200, they still have to have their compliance validated by other card brands like MasterCard, American Express or Discover.

   And while you can say you'll shift liability to someone else, ultimately that cost will be shifted to someone else. And we know who that will be.

   None of this is meant to diminish the security advantages of EMV over our current magnetic-stripe card system. But if you're pinning your hopes on the American payments industry being shamed into putting on a clean shirt and adopting EMV, or on merchants, card companies, and processors all playing nice in the sandbox, given the litigious and legislative history of the last eight years, we might not be as close to EMV as you think.

   So, while EMV and chip cards might be right around the corner, the road to that corner still appears pretty long and still filled with some formidable obstacles.

   That's my opinion. What's yours?


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