The Global Payments Standard – Is Your FI Ready?

By Aris Jerahian, TMG Vice President of Client Relations
Chip-and-PIN technology to support EMV (or the Europay-Mastercard-Visa standard) exists or is very near existence in nearly every developed country in the world. And that’s creating problems for the U.S., which has remained steadfast in its continued use of magnetic-stripe cards.

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U.S. FEELING THE PRESSURE

The threat that has industry observers most concerned is the muchdiscussed path of least resistance that near-global EMV adoption is creating for fraudsters. Criminals thwarted by the tough-to-skim EMV chip cards are following that path straight to our shorelines, posing tremendous risk for American card issuers, merchants and cardholders. EMV is still fairly new, yet we have already seen its impact on fraud. Canada alone reported a more than 20 percent decline in overall credit card fraud for 2009 as compared to 2008.1 The fraud loss rate on payment cards in the U.K, the first country to fully implement EMV, declined from 18 basis points to 12 basis points between 2001 and 2008.2 Of course, there is no way to validate this decrease is due solely to EMV adoption.

As card issuers field an increasing number of complaints about the ineffectiveness of cards overseas, the pressure to satisfy these cardholders grows.

While fraud concerns dominate, the ability of Americans to use their U.S.-issued cards to pay foreign merchants is another key reason many are calling for U.S. adoption of EMV. As card issuers field an increasing number of complaints about the ineffectiveness of cards overseas, the pressure to satisfy these cardholders grows.
COMING TO AMERICA

There are indications from several ends of the payments industry spectrum that U.S. adoption is considered likely – if not inevitable. First, and perhaps most telling, the Federal Reserve Board has put together a forum of business and industry players to examine the future of EMV in the U.S.3 As reported by Bank Technology News, the forum’s leader stated that “the growing security vulnerabilities posed by magnetic stripes may warrant policy action by the government.” Major domestic retailers have also taken steps to prepare for what company executives seem to believe is an eventual mainstream adoption of EMV cards. Walmart, alongside others like Home Depot, has been open about its intent to ready its domestic outlets for EMV transactions. Announcing that its stores already have the necessary hardware, Walmart told attendees of a recent NACHA convention that it expects to accept at least one EMV card by the end of 2010.4

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“U.S. Signature-Based Card Fraud Next on Hacker Lists?” PaymentsSource, Sept. 24, 2010 “Top 10 Reasons U.S. Should Consider EMV,” Smart Card Alliance Webinar, January 26, 2010 “The Fed Gets Involved with EMV,” Bank Technology News, September 2010 “Is the United States the Weakest Link When It Comes to Credit Card Security?” SC Magazine, Sept. 29, 2010

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For its part, Home Depot has publicly proclaimed its fears about the potential rise in card fraud and cited EMV as a possible solution. The retail chain’s director of international and interchange financial services recently told ISO & Agent magazine, “Moving to EMV would eliminate most point-of-sale fraud on signature-based transactions, which would eliminate a huge area of losses.”5 The U.S. government and merchant community seem to be on the same page. But what about card issuers? Without their buy-in to the business case of making EMV available to cardholders, the payments standard can’t get off the ground. Research suggests most top U.S. issuers will make EMV cards available within the next several years – to select cardholders, that is.6 These consumers will be the international travelers looking to make transactions and ATM withdrawls outside of the U.S. Catering to this group of cardholders, which spends on average six times more than their homebound counterparts and comprises nearly 4 percent of all credit card spending, makes sense for issuers – particularly those still reeling from the profit-shrinking effects of the Credit CARD Act of 2009. Small issuers may be tempted to shrug off this particular prediction because their cardholders do not travel abroad with as much frequency as those of the top U.S. issuers. However, neighboring countries Canada and Mexico are each very near completion of their countrywide conversions to EMV. American cardholders who enjoy fishing in the north and sunning in the south may soon find themselves in the same mess as European travelers, particularly if these countries follow Europe’s plan to ban mag-stripe transactions altogether.7 The entree to the payments scene of technologies bridging mag-stripe to EMV is another indication that we are closer than ever to achieving adoption of the global payments standard here in the U.S. Take TMG partner First Data Corp., for instance. By testing STAR CertiFlash, a chip sticker technology it says will offer higher security to debit account holders, the company is preparing not only for EMV adoption, but for the mobile movement gaining steam in the U.S.8

Research suggests most top U.S. issuers will make EMV cards available within the next several years – to select cardholders, that is.

In a sign even closer to home, TMG recently aided client United Nations Federal Credit Union (UNFCU) in its migration to EMV cards. Members of the $3.1 billion credit union carry UNFCUissued credit cards as they travel to and from United Nations agency destinations like Geneva and Nairobi. The goal to balance members’ access to credit with fraud protection made adoption of EMV a strategic move for the member-centric financial institution (FI).

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“U.S. Signature-Based Card Fraud Next on Hacker Lists?” PaymentsSource, Sept. 24, 2010 “Chip Cards in the U.S.,” The Nilson Report, #930, July 2009 “U.S. Magnetic Stripe Credit Cards on Brink of Extinction?” CreditCards.com, August 4, 2009 8 “A Step Closer to EMV” Bank Info Security, September 3, 2010

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UNFCU Card Services Manager Merrill Halpern likens EMV cards to an “insurance certificate” for cardholders, reassuring them that every transaction they make is as secure as possible. For that reason, UNFCU introduced this technology to its membership. “For UNFCU, the EMV card is all about service,” said Halpern. “While important for the global traveler, the cards also bring a higher level of security to the domestic cardholder, extending beyond mag-stripe technology.”
EMV BENEFITS FOR CARD ISSUERS

So, is the timing right for your FI to begin an EMV program? When it comes to analyzing the business case for EMV, issuers must examine both sides of the decision. Does an EMV offering make sense for our FI and its cardholders – both those we currently serve and those we would like to in the future? Advantages to launching an EMV card program generally fall into one of four categories, including the ability to:
ADVANTAGES TO LAUNCHING AN EMV CARD PROGRAM

1) increase security and fraud prevention; 2) boost cardholder loyalty; 3) retain and attract higher spending cardholders; and 4) grow your card portfolio.

Security EMV promises to change the way credit and debit card point-of-sale transactions are authenticated by verifying that the person attempting to use the card is authorized before the transaction takes place. As it stands today, mag-stripe transactions authorized online are based on sufficient funds and the current standing of the account, not whether the person swiping the card is, in fact, an authorized user. With chip-and-PIN technology, criminals attempting to use a stolen or cloned card won’t make it past the swipe because they would also need to know the PIN associated with the card. What’s more, the microprocessor embedded within the card’s plastic has the ability to store data more securely than a mag-stripe. Unique security keys placed in the microprocessor make the cards more resistant to cloning.

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As an added security benefit, chip-and-PIN technology allows for offline authentication with no data or communication leaving a terminal. These terminals are often unmanned and are popular in Europe at parking garages and train stations, for example. When a cardholder needs to make a purchase through an unmanned terminal, he or she inserts the EMV card, which is kept inside the terminal until the transaction is complete. The terminal communicates directly with the EMV card’s chip, verifying not only the PIN but the transaction details, such as amounts and transaction counts for the day. No communication leaves the terminal. The information is stored directly in the chip. Loyalty Simply put, cardholders who get what they expect from their cards will use them again. When declines become too burdensome, an international traveler will likely go in search of a solution – all too often provided by a competitor. By issuing the most reliable card possible, FIs increase their share of wallet and turn customers into cardholders-for-life. Attraction It’s true that EMV is far from mainstream, but as mentioned above, retailers, technology providers – even the government – are preparing for what many believe is an inevitable adoption of EMV on the home front. By preparing for EMV now, your FI not only positions itself for future growth, it attracts a specific cardholder today. That cardholder is an international traveler spending six times more than the average American cardholder. Growth Beyond growing the number of accounts by attracting the high-spend travelers, FIs stand to grow their interchange income – a revenue stream likely to undergo changes in the very near future as the Federal Reserve Board regulates debit card fees. By ensuring that your cardholders will be able to use your FI’s card virtually anywhere, you place a near-guarantee that yours will be the card at the top of your cardholders’ wallets – not only when they travel, but while home, as well.
UNFCU BLAZES THE TRAIL

To strengthen security, as well as add another benefit to its already impressive credit card offering, TMG client United Nations Federal Credit Union (UNFCU) completed its first stage of credit card conversion to EMV in October of 2010, making it the first FI in the U.S. to commit to the technology.9

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“United Nations FCU Becomes First Chip and PIN Card Issuer in the U.S.,” Credit Union Times, May 26, 2010

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The credit union faced an above-average fraud exposure due to its international-traveling membership. Fraud strategies common among credit unions of this size – such as declining transactions in highfraud regions – are not possible for UNFCU, whose nearly 90,000 members rely on access to credit from some of these very locales. Considering the hard costs and benefits of net fraud reduction, interchange leakage, and direct investment, EMV migration was the optimum decision to make. UNFCU’s EMV card – which also includes a magnetic stripe to make domestic transactions possible – is known as the Visa Elite Card, which carries with it the same features and benefits as its predecessor, Visa Platinum. These include low interest rates, a limit up to $100,000, worldwide VIP airport lounge access and concierge services, and a slew of additional perks important to frequent travelers.
IMPLEMENTING AN EMV CARD PROGRAM

To strengthen security, as well as add another benefit to its already impressive credit card offering, UNFCU completed its first stage of credit card conversion to EMV in October of 2010, making it the first FI in the U.S. to commit to the technology.

Before beginning an EMV conversion, FIs must complete due diligence when selecting the partners they will work with throughout the process. By the nature of their business relationships, card processors have the potential to serve as an excellent resource, as well as an overall project manager for an EMV conversion. Four questions to ask your processor before going EMV Do we have a business case for EMV? This is where all FIs must start when examining whether or not to move forward with an EMV program. A great place to begin this analysis is with your existing card processor, who is already familiar with the strengths and weaknesses of your card portfolio. What have your fraud losses amounted to, and is that number likely to be improved with an EMV program? How often have your cardholders been declined overseas? What will EMV implementation likely cost, and is there a business case for moving forward? Can you offer end-to-end guidance throughout the process? Because your FI is likely to work with many different vendors throughout an EMV conversion, it’s important to have one point of contact who can serve as a trusted project manager. Card processors can be an ideal leader, as they often have solid relationships with the vendors who will produce the card, validate and certify transactions and understand the regulatory and processing requirements. Ask your card processor if they have specific

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experience implementing an EMV program and whether or not they have the ability to make recommendations from outset to completion. Do you have support tools that will make the transition to EMV easy for our cardholders? While convenience is one of the driving factors for adoption of EMV, getting there takes time. Cardholders will inevitably have questions with regard to the use of their cards, such as what to do if they’ve forgotten their PIN, how long it takes for an offline transaction to post and where they can find a domestic chip-and-PIN location. A processor that understands how an EMV transaction flows through the authorization channels differently than a typical mag-stripe transaction will be an invaluable partner, not only to you, but to inquiring cardholders. Can you prepare us for the challenges we will face? Key to selecting a partner is understanding whether they have been through the EMV conversion process. Processors like TMG, which UNFCU has called “instrumental” in the implementation of its EMV program, have specific knowledge from which other FIs can benefit. For instance, experienced advisors will recommend detailed testing and certification plans, as well as provide context around decisions your FI will need to make, such as what limits to place on offline transactions or whether or not to allow for cardholder-selected PINs. Without U.S. mainstream adoption, EMV will never truly become the global payments standard. Payments innovators no doubt will unleash new and exciting alternatives to EMV over the next few years, giving us even more options to consider on behalf of U.S. cardholders. Yet, significant signs point to a serious examination of domestic EMV adoption. Should this foretell an inevitable U.S. participation, will your FI be prepared?

ABOUT THE AUTHOR
Aris Jerahian is vice president of client relations for TMG (The Members Group), working to establish long-term, successful partnership with credit unions. With more than 12 years of account management, consulting and operational experience, Aris is capable of delivering the tactics and practical advice credit unions need to grow their card portfolios. He is the author of “Courage to Change,” which aims to help readers improve both their professional and personal lives, and serves as a council member on the Council of Advisors for Gerson Lehrman Group, a global network of executives who provide consultation to leaders in the investment community.

The Members Group

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1500 NW 118th Street

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Des Moines, Iowa 50325

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800.268.1884

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www.TheMembersGroup.com

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