This October marks a major change in credit card policy for large and small businesses across the United States. That’s when liability for fraudulent credit card transactions will shift from credit card issuers to merchants who do not have payment terminals set up to accept chip-based cards (as opposed to the older magnetic strip credit cards typically used in the U.S.).
Many credit card issuers have begun sending out the newer chip-based cards to cardholders, but a lot of U.S. stores still use older payment terminals that don’t accept chip-based cards (newer terminals accept both).
This liability shift means that retailers who aren’t prepared will “turn into an insurance company insuring all the fraudulent transactions, which nobody wants to do,” said Sam Zietz, CEO of payment processing company TouchSuite. Most large retailers already have this issue on their radar, he added, but many smaller businesses don’t. “I have a feeling that most of them are going to learn this lesson the hard way,” Zietz said.
In fact, a study conducted by technology advisory company Software Advice found that 69 percent of small and mid-sized business owners doubt they’ll be able to meet the October deadline to accept chip-based cards, and 26 percent aren’t familiar with the technology. Here’s what you need to know about the transition to chip cards.
How Chip Cards Work
Chip cards use EMV technology — Europay, MasterCard and Visa — that is common in other parts of the world. Instead of storing all of a card’s information on a magnetic stripe, the chips create one-time keys for each transaction, which makes chip-based cards much harder to counterfeit. At point of sale, the consumer inserts their card into a chip reader instead of swiping the magnetic stripe.
While other countries use chip and PIN cards (where a customer enters their personal identification number to authenticate the transaction), some issuers in the U.S. are offering chip and signature cards (where a customer signs rather than entering a PIN). When a customer pays with a chip and signature card, the signature process would be the same as with a magnetic stripe card.
EMV cards can help prevent fraud with in-person or card-present transactions, but they do not prevent fraud for online (card not present) transactions. As a result, Dawn Murray, vice president and general manager of merchant services at the global payment company FIS, predicts that fraudsters may shift their focus to online transactions or transactions at retailers who are not set up to accept EMV cards. “(Retailers) might think ‘I don’t have any chargebacks today, so this liability shift doesn’t impact me,’” she said. “Fraudsters are going to be looking for people that don’t have the EMV terminals, so merchants who aren’t accepting EMV are more likely to be targeted by crooks with the fake plastic.”
How to Meet the October Deadline
Contact your payment processor to ensure that your P.O.S. terminals are ready to accept chip cards. They may not yet support those capabilities, but they should be working on a solution. “There are a few processors that have EMV applications certified already but a lot of the processors are struggling with getting those applications that go into those terminals,” Murray said.
If your processor has EMV-enabled terminals but is still finalizing its software, you may be able to order the terminals now and update the software later once it’s available. “I’m pretty confident saying that every processor will have a solution by October, but the longer they wait until that deadline, the more herculean task it will be to convert all their clients to this equipment,” Zietz added.
The cost of upgrading terminals varies depending on the payment processor used and the number of terminals. The manufacturer’s retail price on an EMV terminal ranges from $400 to $500, according to Murray, but some processors are offering payment plans or absorbing the cost of the terminals themselves to get their customers upgraded.
While many people upgrade their cell phones every two years — some even more often — most merchants keep their payment terminals much longer than that. “They look at it like their laptop,” said Dan Brames, group executive of North American retail payments at FIS. “As long as the software is still working, they’ll use (a payment terminal) for eight to 10 years because it’s not broken.”
Training your staff on the new payment terminals shouldn’t take too much time, according to Zietz. Even if your payment terminal has a slot for inserting a chip, don’t assume that you’re in the clear. Your payment terminal might be EMV-ready but lack the software to actually complete an EMV transaction. By now, most Americans have at least one EMV card in their wallet, so Zietz suggests trying a test transaction with an EMV card to see if it goes through, a step that you should take sooner rather than later. “Most of us like to put things off until there’s a deadline,” he said. “But if you wait, there could be very long lines and scarce supply.” Upgrading now will help give you peace of mind come October.