EMV Chip Cards Expected for Upscale U.S. Cardholders

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According to The Nilson Report [1], most top U.S. issuers will have EMV-compliant [2] chip cards available to select customers by the end of 2010. These cards will be used for purchases made outside the U.S., particularly in Europe where most point-of-sale (POS) terminals and automated teller machines (ATMs) are EMV-compliant. The cards may be marketed to upscale frequent international travelers, who spend six times more than the average cardholder and comprise nearly 4% of overall credit card spending [3]. The number of international travelers needing EMV-compliant cards will grow as Canada and Latin America continue their roll-out of EMV.

Increasingly, U.S. cardholders are inconvenienced when using their credit and debit cards while traveling, and are falling back on ATM cash withdrawals [4]. Travelers are finding they are unable to use magnetic stripe cards at unattended chip-based terminals for train tickets, parking, tolls or gasoline. Since seven of the top ten countries visited by Americans are converting to EMV chip and PIN cards [5], the problem may get worse. Some smaller merchants are refusing magnetic stripe cards from fear of fraud or confusion on the part of the store clerk. The European Payments Council, the governing body responsible for achieving a single payments market throughout Europe, recently announced it is considering a ban on magnetic stripe cards within the next couple of years [6].

In a bid to maintain “top of wallet” status with their best customers, U.S. issuers are expected to offer select customers an EMV compliant chip card as part of a newly redesigned upscale card product. U.S. issuers are following in the footsteps of the Royal Bank of Canada, which took a similar approach in 2003 with the Avion Platinum microchip card, issued to upscale international travelers. Chip cards will be more readily accepted internationally and increase convenience for travelers. The chip’s secure authentication mechanism reassures the issuer that the card is genuine, so issuing banks can reduce authorization errors and authorize more international transactions that were previously considered too risky.

To implement an EMV program, issuers will need to:

• Educate their customers on using the cards
• Modify authorization processing to accommodate EMV-compliant authorization requests or use a stand-in service from a payment brand
• Determine if offline authorization will be allowed
• Decide how to handle emergency card replacement
• Decide if their programs will be implemented using PIN, signature or both for cardholder verification; both are accepted by the EMV specification. However, PIN verification would be needed to support offline transactions, which are more common in Europe.

Implementation could be simplified by offering EMV signature cards without offline authorization (“online only”). The business case for issuing EMV-enabled cards to the affluent customer segment should be fairly easy to justify, since it leverages the existing EMV-enabled POS infrastructure in Europe and Canada.

The Smart Card Alliance endorses these efforts as part of a new course for the U.S. market. Using chip card technology is the best way for the payments industry to ensure global interoperability and acceptance and to effectively reduce fraud in the long term. The Smart Card Alliance recommends that U.S. issuers consider issuing dual-interface contact/contactless EMV compliant chip cards, so that the dynamic cryptogram feature can also protect contactless transactions made in the U.S. For more information about the use of contactless for fraud protection, see the Smart Card Alliance white papers “End-to-End Encryption and Chip Cards in the U.S. Payment Industry,” a Smart Card Alliance position paper and “Fraud in the U.S. Payments Industry: Fraud Mitigation and Prevention Measures in Use and Chip Card Technology Impact on Fraud”.

References

[1] “Chip Cards in the U.S.,” The Nilson Report, #930, July, 2009

[2] Europay MasterCard Visa. Specifications developed by Europay, MasterCard and Visa and managed by EMVCo that define a set of requirements to ensure interoperability between payment chip cards and terminals.

[3] According to the Nilson Report, 5 million upscale cardholders generate 19% of all U.S. credit card spending among U.S. cardholders. Approximately one million of them travel enough to use a chip-and-PIN card in Western Europe.

[4] “For Americans, Plastic Buys Less Abroad,” New York Times, October 4, 2009

[5] Mexico, Canada, UK, Italy, France, Germany and Spain all converting to EMV. “U.S. credit cards becoming outdated, less usable abroad,” http://www.creditcards.com, October, 2008

[6] “U.S. magnetic stripe credit cards on brink of extinction?” http://www.creditcards.com, August, 2009

About the Smart Card Alliance Payments Council

The Payments Council is one of several Smart Card Alliance technology and industry councils. The Council was formed to focus on facilitating the adoption of chip-enabled payments and payment applications in the U.S. through education programs for consumers, merchants, issuers, acquirers/processors, government regulators, mobile telecommunications providers and payments service providers. The group is bringing together payments industry stakeholders, including payments industry leaders, merchants and suppliers, and is working on projects related to implementing EMV, contactless payments, NFC-enabled payments and applications, mobile payments, and chip-enabled e-commerce. The Council’s primary goal is to inform and educate the market about the value of chip-enabled payments in improving the security of the payments infrastructure and in enhancing the value of payments and payment-related applications for industry stakeholders.

Council participation is open to any Smart Card Alliance member who wishes to contribute to the Council projects.