"TECTONIC SHIFTS IN THE PAYMENTS INDUSTRY"
PACIFIC OIL CONFERENCE
GRAND SIERRA RESORT, RENO, NEVADA, SEPTEMBER 18, 2012

I am sorry to say that the credit card associations have come up with some new things that you're going to have to deal with in the next few years.

EMV=Europay, MasterCard, and Visa

You pay a significant amount of money to process credit cards and debit cards. This is called merchant discount or interchange fees.

There has been a lot of competition on the acquirer end to get merchants signed up and there has been a lot of competition to get cards issued to consumers.

We have a business of pennies and nickles. That's the business we're in and it's a good business.

With debit cards, there is no risk. If the money is there, the transaction is approved.

One of the dirty little secrets of the credit card industry is the issuers are not paying for those rewards cards — you are. If someone presents a high value rewards card, the merchants pay a higher fee to accept that card. That is how issuers fund the airline tickets or awards and, as a consequence, fees have continued to go up.

The Durbin Amendment was intended to have the effect of lowering debit costs for merchants and create greater competition among debit networks to attract and retain merchant and acquirer business. In Dick Durbin's world, those cost reductions would be passed along to consumers.

We have seen savings associated with the Durbin Amendment. Geography is going to play a large part. People in California, Oregon, Washington are going to see a larger effect because debit card usage is more widespread. In areas of the Midwest, retailers are still taking checks, primarily. There are some areas out here where you'll be hard-pressed to find a retailer who will still take a check.

West Coast customers have saved approximately 32% due to the Durbin Amendment.

Credit card companies have not taken kindly to this cut in their income stream. They're starting to push gift cards with the Visa and MasterCard logo on them because they don't have to pay the lower exchange rate on the card.

EMV. What it is is a chip standard that is intended to make credit cards more secure. An EMV card has a mag stripe and a chip on it and that chip is electronically and cryptographically secured. The chip could be copied but it requires some technological sophistication and the ROI is too low for a thief.

They are in use in Europe and almost through rolling out in Canada.

There are two flavors of EMV. One inserts the card into the reader, it's swiped, and you sign the receipt. In Europe, they use chip and pin. You swipe the card, enter the PIN, and it activates the card.

There are tap-and-go cards with RFID. You don't have to physically insert the card into the reader. They are just starting to be rolled out.

On a worldwide basis, over 1 billion cards have been issued with EMV. In the U.S., it's around 150 million, so we have a ways to go.

You don't have the infrastructure to use the EMV cards. The credit card companies don't have the infrastructure to make enough EMV cards for the U.S., either. A traditional card costs them about 6 cents to make. The EMV card costs about $1.50 to produce.

In the UK, beginning in January 2005, merchants paid for the cost of any fraud if their equipment was not EMV compliant.

Visa, MasterCard and American Express have all announced incentives to implement EMV. It's going to be expensive for the retailers and it's going to be expensive for the issuers. This is not a mandate. However, there are incentives. There will be a liability shift for counterfeit transactions, effective as of October 2015. It will be October 2017 for pay-at-the-pump transactions. What this means is if someone presents a contact chip card to a merchant that has not adopted contact chip terminals, liability for counterfeit fraud may shift to the merchant. But if an EMV card reader has been put in by the retailer and the card does not have a chip, then the liability transfers to the card issuer. Shame on them for not sending an updated card.

If I were a retailer and I had to choose, I would choose chip and pin. But the associations have not announced if they're going to use chip and pin or the swipe and sign.

Where can you buy EMV equipment today? You can't. The associations have just sent their information about how the system is going to work in the U.S.

It's not a bad idea to talk to your vendors and your acquirers now. When will they have equipment available? What are they going to do to support you in terms of training?

The EMV card will not reduce or eliminate your need to be PCI compliant. You still have to have firewalls, you still have to keep numbers encrypted or use tokenization.

While it is going to be difficult to justify the ROI on this, keep an eye on the "squeezing the balloon" affect. You don't want to be the last one on your block to implement the EMV card because every fraudster will run to your business to try to get those last few fraudulent transactions through.

If you run websites and you accept credit cards, there is no way to put the EMV protections on-line. So you're going to need to look at additional protections.

In a lot of ways, it's still a wild west out there for digital wallet transactions. I don't see a whole lot out there that's going to help you guys out a lot. If you're in San Francisco (for Google Wallet) or Salt Lake City (with Isis) you may want to look into their couponing to see if there's something that might drive traffic.

The good news is you do have an extra two years for pay at the pump. And it's not a mandate. It's just a liability shift. But I would suggest you allocate some extra money when it's time to do your refresh.