Fintech Insights

How to navigate the EMV liability shift


July 09, 2019

What you need to know about the EMV liability shift

October 2015 marked the beginning of a new era for accepting payment cards in the US. That’s when the EMV liability shift took place, reassigning responsibility for credit card fraud and introducing the now ubiquitous chip cards.

A global standard for the secure processing of electronic payments, EMV represents a paradigm shift that advances payments several decades beyond the magnetic stripe technology it replaces. Here, we’ll answer some of the most commonly asked questions about EMV.

What is EMV?

EMV stands for Europay, Mastercard, Visa, and is a global standard for securing electronic payment transactions using chip card technology. EMV helps protect businesses and their customers from financial loss due to the fraudulent use of payment cards. EMV is managed by EMVCo, which is overseen by the leading card networks, American Express, Discover, JCB, Mastercard, UnionPay, and Visa, and supported by banks, merchants, processors, vendors, and other industry stakeholders.

How do EMV chip cards work?

EMV chip cards create a secure dynamic network link and generate a one-time code for every payment.EMV transactions can only take place with a valid chip card in a chip-enabled terminal. Magnetic stripe technology relied on static storage of data that may have been highly secure in the 1970s but is easily cracked by hackers today. The change from magnetic stripe to EMV is the biggest change to credit and debit card acceptance in a generation. The change brings credit card acceptance from the analog era to the digital era.

What are the main benefits of EMV?

EMV is designed to create a safer and more secure environment for businesses to accept electronic card payments. EMV helps reduce the risk to businesses of losses related to counterfeit, lost, or stolen card fraud. EMV assists with keeping personal card data safe from card skimmers that exploited the weaknesses of magnetic stripe technology.

Why did the liability shift happen?

The liability shift happened with the goal of reducing the costs of counterfeit fraud and make payments safer for everyone.EMV is newer to the US, while the EMV upgrade is much further along globally. Chip card technology has proven effective in reducing in-store, card-present counterfeit fraud wherever it has been implemented. The 2015 liability shift represented an effort by the card brands to incentivize adoption of EMV technology.

Has the EMV liability shift worked as intended?

Yes, EMV has been effective in significantly reducing card-present fraud. In a March 2018 chip card update, Visa reported that merchants who had completed the chip upgrade witnessed a remarkable 76% decline in counterfeit fraud dollars from December 2015 to December 2017.

However, it’s important to note that EMV does not address card-not-present fraud, so businesses can’t rely on the technology to protect them from every type of fraud scenario today.

Have there been any challenges in the US implementation of EMV?

Yes. The implementation of EMV standards in the US remains a work in progress, in part because the US is much larger than most countries. We have well over 10 million points of sale that needed to be upgraded. Compare this number to Canada, for example, which has just one-tenth of this number, and other countries have even fewer systems.

Additionally, the integrated stand-alone payment terminals US merchants use had to go through an EMV implementation and testing process mandated by the card brands— which was complex and time-consuming. This produced some initial delays in rollout to meet the liability shift.

Finally, EMV’s specifications were not originally able to support Regulation II (Durbin) dual network requirements. Merchants and acquirers were required to wait until these specifications were issued in order to begin their EMV enablement for debit, which delayed EMV adoption.

What does EMV mean for my customers?

Chip cards faced market resistance at first. Consumers love their habits, and changing from “swiping” to “dipping” their cards at the point of sale was not always easy. Early challenges with equipment malfunctions and network speed posed additional challenges.

However, more and more, US consumers appreciate the usability, security, and reliability of chip card technology. An April 2018 survey by Worldpay showed the tide of consumer sentiment toward EMV had turned decisively positive:

  • Consumers dip their chip card 75% of the time
  • 76% of consumers are knowledgeable about chip cards
  • 72% of users rate chip cards as more secure than magnetic stripe
  • 82% of credit card users report positive chip card experiences

What does the liability shift mean for my business?

Prior to October, 2015, merchants were not usually held responsible for fraudulent transactions that occurred through no fault of their own. Card issuers (i.e. banks) covered the cost of that fraud. After the shift, liability for losses related to counterfeit fraud shifted to the party that has not invested in chip technology. Card networks, issuing banks, and payment processors are generally ahead of the curve, leaving businesses who haven’t upgraded to EMV the weak link in the chain.

There are exceptions for cases of lost/stolen card fraud, and liability rules often depend on the card-issuing network, the type of card, and the type of terminal used to process it. Talk to your payments partner and refer to the card acceptance guidelines and merchant service agreements for details.

Are there different rules for ATMs and gas stations?

Yes. Because of the cost of upgrades and other factors, dates for the liability shift were extended for automated fuel dispensers (AFD) and ATM machines.

The Mastercard ATM EMV liability shift took place in October, 2016, while Visa and the other major card brands gave ATM operators until October, 2017 to become EMV compliant. The liability shift for Automated Fuel Dispensers was also originally set for October, 2017. In response to industry feedback about the challenges of EMV upgrade/replacement efforts, the liability shift for AFDs was moved to October, 2020.

With the extended deadline for gas stations and convenience stores, is fraud expected to increase at those locations?

As more retail locations become EMV enabled, fraudsters are likely to target those merchants like gas stations that have not migrated yet. However, there are tools that merchants in the fuel space can use at their pumps to try and combat fraud. For example, cardholders may have to type in their zip code when completing a transaction. This is another piece of data that fraudsters would need to have in addition to the card holder’s payment information.

What’s a fallback transaction?

“Fallback” is an established backup process for failed EMV transactions. Fallback happens when the chip card or terminal is malfunctioning and the transaction is completed using magnetic stripe or is key entered. The card issuer assumes liability for properly formatted and approved fallback transactions.

Will chargebacks increase if I don’t upgrade to EMV?

Very likely, yes. Fraud brings big costs to small businesses. If you haven’t upgraded to EMV-enabled terminals and a counterfeit card is used fraudulently, first you must refund the charges to the cardholder. Then there’s the chargeback fee. Add the loss of the item that went out the door with the fraudster. Don’t forget the time, expense and hassle of managing chargebacks. It all adds up.

Programs to help mitigate some of the challenges of the EMV migration, such as the Visa chargeback relief program, phased out in April 2018. The incentives are in place to help make the cost-benefit of upgrading to EMV highly favorable to merchants.

How can I upgrade by business to chip card technology?

If you haven’t yet upgraded your systems to implement EMV technology to securely accept chip cards, now is a great time to do so. It’s easier and more affordable than ever to upgrade. EMV terminals also often have encryption, tokenization, and near field communication technology to enable contactless and mobile payments acceptance.

If you’re ready to upgrade the way your business accepts payments to the most modern and secure solution, connect with a payments expert at Worldpay today.