Wednesday, 16 March 2011

From leader to laggard...the USA and the death of magnetic stripe card technology

For a long time now many of us in Europe have been aware that magnetic stripe card technology is becoming increasingly archaic in a world of smart cards (Chip and PIN or EMV) - yet it seems that those countries that have made a significant investment into this technology have had to grit their teeth and, for various reasons, continue to put up with magnetic stripes on their payment cards.  Belgium recently hit the headlines when the Belgian banks publicly stated that from 17 Jan 2011 Belgian Maestro cards can no longer be used outside of continental Europe.

There is a sense of frustration that just because the USA is not moving towards EMV, the world is being held back in this particular battle against fraudsters - magnetic stripes are relatively easily compromised and the data then used to create cloned or counterfeit cards. 

So it was with a sense of relief that I read a MSBNC blog post predicting that after a life span of nearly 50 years, the time may now be right to start preparing a eulogy for magnetic stripe cards.  At last, someone on the other side of the 'pond' telling it as it is!  The only part of that post that I would take issue with is the statement that US Fraud rates are catching up to what Europe has............I wonder which figures are being used?  Cash losses due to compromised European cards (i.e. ATM withdrawals) now appear to be increasingly international, taking place outside of Europe and with a significant amount occuring in the USA........If any one can point me in the direction of truly comparative loss figure (USA vs Europe) I would love to see them.  My feeling is that US losses may already have passed European levels........

On 1st January 2005 a transfer of liability for fraudulent card use came into effect in Europe, commonly known as the EMV ‘Liability Shift’. For payments and transactions in Europe, this meant that the responsibility for losses due to fraudulent card transactions remained the responsibility of the card issuer (the bank issuing the card) if the card was not an EMV card, but became the responsibility of the acquirer (the bank or company operating the ATM) if the ATM was not upgraded to the EMV standard, or if it did not operate in accordance with the EMV standard.  Last year both Canada and South Africa have also started to participate and there is no reason to doubt that other countries that are adopting EMV will not follow suit.  Of particular interest is that China UnionPay has stated that all Chinese bankcards will be EMV by 2015.

So there are three possible drivers that may force the US Banks to surrender to the inevitable and start an EMV migration process:
  1. Fraudsters will increasingly migrate to the USA to perpetrate a form of crime (card skimming) that has been well proven for them in other parts of the world that have now shifted (or are shifting) to EMV.  As other markets become too difficult, the US becomes an obvious choice.   This will be bad for the image of US banks and will lead to domestic media and cardholder pressure.
  2. Losses due to card fraud from EMV cards issued in Europe (and other countries adopting the EMV standard) will increasingly occur in the USA resulting in pressure for a liability shift for the losses  - i.e. EMV cardholders may have to 'opt in' to use their cards there, with a possible future transfer of risk........and card issuers across the world putting pressure on US banks to accept a transfer of liability (and as the MSBNC blog post indicates....Europe is leading the charge.  The European Commission, the European Central Bank and the European Payments Council are all urging action of one form or another).
  3. US Cardholders will find it increasingly difficult to use their magnetic stripe only cards at payment terminals in parts of the world that have migrated to EMV, as chip only payment terminals are becoming more and more common....this will lead to domestic cardholder presssure to have cards that are globally accepted.
So you have to admit that change for the USA does look inevitable, with perhaps only the pace of that change up for negotiation - a country that led the world with the invention of the magnetic stripe is now dragging behind the world as its replacement is rolling out......... and, in addition to Europe and Canada and many other countries and regions, China the emerging economic super power is pulling away strongly in the new direction.

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