The Ramifications Of EMV

The recent media coverage of the UK banks’ decision to switch all credit and debit cards from the traditional magnetic stripe and signature to the new chip and PIN by 2005 missed some of the really interesting implications. Using a PIN instead of a signature will be the first major change in payment cards that consumers have seen for a generation, but the decision to switch has ramifications beyond security and convenience at the supermarket checkout.

By the end of 2004 or early 2005, all of the credit and debit cards in Britain will have been converted to EMV smart cards with PIN. The idea of using smart cards with PINs is hardly new. All French payment cards have been smart cards with a PIN for more than a decade and have enjoyed considerable success in reducing fraud. There have been no obvious signs that consumer acceptance at point–of–sale (POS) or automated teller machine (ATM) has been a problem, and because the PIN check is quicker than a signature, it is less costly for retailers.

Millions of people in Britain have already been switched to payment cards with chips on, but they use a slightly pointless UK–only cut–down version of EMV without a PIN . When they are switched again, over the next couple of years, to EMV they will be the same smart payment cards that will be issued all over Europe (and, in fact, the world).

The transition to the use of the smart payment cards (“EMV migration” in the jargon) is progressing rather well, with Visa expecting 69% of its cards to be compliant by end–2003, and 88% by Q3 2004, in time for the “liability shift” in January 2005. Two–thirds of Europay’s cards and the acquiring infrastructure will be ready at the same time . The liability shift is the point at which merchants will have to bear the cost of fraudulent magnetic stripe transactions.

So who cares?

Banks Care The cost implications for issuing banks are not insignificant. Putting tiny computers into peoples’ pockets is a big step and it’s going to cost them a lot of money. The principal reason for spending this money is to cut down on card fraud which, although a small fraction of the nearly £19 billion that UK consumers spent on plastic cards in December 2001 alone , is rising rapidly.

The original reason for the transition to chip was essentially negative (to cut fraud rather than to deliver new products and services) but a change in outlook is underway. For banks, retailers and others the most significant impact of EMV will be less to do with retail POS, reduced counterfeiting costs and less card fraud than it will be to do with

• The introduction of remote POS (rPOS) services through PCs, digital TV, mobile phones and so on. This creates a whole new payments sector and should stimulate significant innovation and new services.
• The addition of loyalty, e–purse and other applications on multi–application smart cards.

These kinds of initiatives show where the sector is going in the medium term and developing common rPOS standards for the use of EMV over the Net (either directly or as a 3D–Secure or SPA authentication token ), EMV over GSM and EMV in television set–top boxes (STBs) should be something of a priority.

Thus, as banks around the world begin to issue multi–application EMV credit/debit cards, potentially with electronic purses and other applications on board as well, the real impact of the EMV migration will be felt away from the “traditional” retail POS. So retailers and consumers will also notice some big changes.

Retailers Care The changes will, in the short term, affect some retailers more than others. When you pay for something in a supermarket, not much will change: instead of handing your card to an assistant and signing a receipt, you will put your card into a small terminal with a keypad and punch in your PIN. In the great scheme of things, not much difference.

The ability to accept unattended and remote POS transactions with card present rules, rates and rights will allow retailers to reconfigure their POS environment and the ability to carry other applications on the same card as the EMV application will allow them to offer entirely new consumer services (sophisticated loyalty schemes and the like).

Consumers Will Care Consumers will notice more change in the medium term, because while buying things in shops will change a little, buying things at home (or in the office or wherever) will change a lot. If consumers can pay without handing their card to someone and without signing pieces of paper, then they can buy things in new ways. At home, for example. There are already more than six million households in the UK with a smart card interface already installed: in their STB. By the time the EMV migration is complete, there will be ten times as many televisions able to accept EMV cards as shop terminals!

Digital TV is a particularly interesting case. Although few televisions are being used for e–commerce right now, this will be a significant use of the 29 million STBs that will be in place in Europe in 2003. Even in the smart card third world (the US), General Instrument have announced that they will develop STBs for digital cable operators capable of accepting smart cards complying with Visa’s Open Platform specifications. This represents a huge expansion in smart card–enabled POS locations: almost all digital set–top boxes in Europe and Asia–Pacific will come equipped with a second slot that could be used for EMV and electronic purse cards.

T–commerce revenues in Europe in 2005 are forecast to approach 30 billion euros and a Visa pilot programme to allow consumers to buy using their EMV cards in their set–top boxes has already started in (where else?) Finland.

This is why the decision to replace a hundred million or so “dumb” cards with “smart cards” should be of interest to lots of people apart from banks and traditional retailers. You may have yawned when you heard about the coming switch to “chip with PIN”, but it really is more important than you may have thought at the time.