Merchants beware: A liability shift is coming in the way you process credit card transactions

October 6, 2015

In response to increasing credit card fraud, major credit card companies have set an Oct. 1 deadline for merchants to shift from the traditional magnetic strips, to a new integrated circuit technology called EMV. Merchants that do not adopt this new system may be liable for credit card fraud.

It’s no secret that credit card fraud is an increasing problem both in the United States and around the globe. Approximately 31.8 million consumers in the U.S. reported credit card fraud in 2014 – more than three times the amount affected the previous year.

To add concern to these already alarming statistics, Barclays recently reported that the U.S. is responsible for 47% of the world’s card fraud, despite only accounting for 24% of the world’s card volume.

In response to these increasing numbers, major credit card companies – Visa, MasterCard, Discover and American Express – have set an Oct. 1 deadline for merchants to shift from the traditional magnetic strips found on most cards today, to a new integrated circuit technology called Europay-MasterCard-Visa, or EMV. The purpose of this new chip is to decrease fraud and increase protection. The concern for merchants? A revolutionary liability shift.

What is EMV?

Although the integrated circuit technology may sound intimidating, it’s really quite straightforward. With major U.S. banks deciding to alter the insides of our credit cards, we should begin to see small gold or silver microchips resembling something out of that Bruce Willis movie, The Fifth Element. If you recently received a new card, you know what this chip looks like.

Essentially, the new EMV technology operates as a plug-and-go payment system, which replaces the traditional swiping we are all too familiar with. Payment data on a chip-enabled card is more secure than the magnetic strips because the chip supports dynamic authentication, while the strip data is static and is easily copied by potential fraudsters with a cheap card-reading device.

This new technology is “an evolution in our payment system that will help increase security, reduce card-present fraud and enable the use of future value-added applications.”

How does the mandate affect merchants?

One of the main concerns regarding EMV payment is not in the chip itself, but in the new mandates enacted by large credit card companies. Naturally, merchants are reluctant to institute changes to their payment systems. New point-of-sale systems will increase costs to merchants, while little of this cost is passed on to consumers.

So the question for merchants is, “Why should I change my POS system and who will force me to make the switch?” The answer is nobody. You likely won’t lose business. You won’t be fined. Your payment systems will process as usual. However, there is one detail you may want to be aware of. Come Oct.1, merchants without EMV terminals will be liable for fraud against consumer credit cards.

Yes, Visa, MasterCard, Discover, and American Express have announced that the new EMV standard will impose a “liability shift” on merchants that choose not to participate in supporting this new chip technology.

“With the liability shift, if a chip card is presented to a merchant that has not adopted a terminal that is certified for chip card acceptance, liability for counterfeit fraud may shift to the merchant’s acquirer – who may then pass this fee back to the merchant,” according to Chase Bank.

What do you need to know?

The liability shift imposed by major credit card companies encourages chip adoption for a couple reasons. One, chip-on-chip transactions (chip cards read with certified chip payment systems) afford dynamic authentication, providing better protection against fraud. Additionally, any fraud on a card using a magnetic strip on a certified terminal will become the liability of the card issuer, not the merchant.

To prepare for EMV migration, there are a few steps merchants can take to ensure they aren’t victims of this new liability shift:

  1. Become familiar with the new requirements and ensure your employees know what to expect with the new terminals. Although this may not be the most favorable switch, customer satisfaction is always a top priority.
  2. Start the mitigation process early. October 2015 is rapidly approaching. Although it is not a hard deadline to make the switch, merchants that do decide to prolong the mitigation to EMV technology risk becoming liable for an increasing number of fraudulent transactions on traditional magnetic strips. As fraudsters become aware that their opportunity to counterfeit old cards is declining, they are likely to make one last push – don’t let their tricks become your misfortune.
  3. Plan accordingly. Switching POS systems can be a costly and time-consuming process. Merchants that take steps to lie out a plan and prepare for the transition will ensure a smooth transition. Moreover, for some merchants, preventing fraud may not be worth an immediate investment in the new technology. Take a look at your business model before you decide to make the switch.

Ultimately, whether the October 2015 deadline is something merchants wish to take very seriously is up to them. This is America and merchants are free to choose whether or not they wish to make the switch to EMV technology. But one thing is certain, this is the new wave of POS transactions, and businesses that prolong the transition open themselves up to increased liability. So is it worth the risk? Probably not.

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