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The Curious Case of EMV

If you follow the comings and goings within the financial services industry you’re familiar with the issue of EMV. It’s an issue every consumer needs to be aware of because the changes being discussed affect your debit card.

EMV stands for Eurocard, MasterCard, and Visa. It is a security standard established by the three card brands (MasterCard subsequently acquired Eurocard) in 1994 for payment cards like your debit card. Rather than rely on the humble magnetic stripe on the back of your debit card for dealing with your personal card data, EMV uses a harder-to-hack computer chip on the card for authorizing your PIN.

Today all industrialized countries with the exception of the U.S. and Israel have adopted EMV. There are a lot of reasons for that which we won’t go into. Suffice it to say that the financial industry is in the midst of a barroom debate over the best way to implement the standard.

Here are the players: On one side you have the two big card brands, Visa and MasterCard. Allied with them are the major card issuing banks. These are the institutions that issue millions of debit cards that carry the Visa and MasterCard brands.

Visa and MasterCard have upped the ante on EMV by setting deadlines for various industry segments to comply with their diktat to accept EMV-enabled cards. Their leverage is an attempt to shift fraud liability from the card issuing bank to the retailer or ATM where a debit card may have been scammed.

On the other side you have the other players who are involved every time you use your debit card. These include the retailers who accept the cards, the ten or so PIN debit networks that transport your card data back and forth from your financial institution so your purchase transactions can be authorized, transaction processors and assorted smaller financial institutions like credit unions and community banks.

It’s important also to note that this debate is being conducted against the backdrop of a ten-year feud between the big-box retailers on one hand and Visa and MasterCard on the other.  Like most business conflicts this feud comes down to money. The retailers have alleged that the card brands make too much money processing the card that people use to pay for stuff they sell. So far the retailers appear to have gotten the better of the card brands. This includes billions of dollars in settlements, not to mention Congressionally-mandated price caps on how much banks can make on the interchange they charge retailers for authorizing their card transactions.  

So amid this poisoned atmosphere the parties are attempting to negotiate the implementation of what is arguably the biggest technology shift in the payment card business since electronic data capture at the point-of-sale terminal.

A key sticking point right now is a piece of software in computer chip called an Application Identifier, or AID. The way things are done now a POS terminal or ATM will pick up the bank identification number from a card and rout the transaction to that bank for authorization. But EMV is different. The routing scheme is determined by that AID. So the transaction will be routed over the network that has its AID on the card.

The issue of routing is important here to consumers. He who controls the routing for the most part controls who gets the bulk of the processing fees when you use your card. If a consumer’s card doesn’t have the application that routs the transaction over a particular network, that network makes no money. So the threat to consumers ultimately is loss of this multitude of competing networks and potential higher card fees.

Right now Visa and MasterCard are in the catbird seat. As global companies they’ve been issuing millions of cards with their AIDs for years. They also have relationships will all of the major card-issuing U.S. banks. Their motivation to negotiate with their potential competitors who are starting from scratch in EMV appears, shall we say, limited.

For their part the PIN debit networks (Everyone in this story has an acronym or nickname. Let’s call them the PDNs) not named Visa or MasterCard have struggled mightily to come up with a solution. Their proposal is to join forces and develop a single common U.S. debit payment AID.

This seems like a common sense solution: cards with a Visa or MasterCard AID as well as the common AID. But it creates two new problems. First, will card issuers, who own the card real estate, agree to put a second application on their cards, just to keep the PDNs in business? And second, will retailers configure their system to recognize that common AID? At least one large big-box retailer has said it will only accept cards with one application of which the AID is part. Any others will be stopped at the register.

So there you have it. A high stakes game of Texas Hold ‘em. Who wins? Here’s what I think:

The PDNs are fighting for their collective lives here. The common AID is a good solution but time’s probably running out on them. They’re like a football team that’s run out of time-outs and is having trouble getting the right players on the field for one last Hail Mary play.

As far as the retailers go, they can harrumph all they want and arrogantly lay down the law to issuers. But big-box retailing is a high-volume, low-margin business.  Are merchants really going to jeopardize throughput in the checkout lane by sticking to their one-application rule? Will they incur the ill will of customers and the cost of abandoned orders and carts as disgusted customers walk out of their stores? Their technologists might want to. But has anybody talked to the C-suite? Standing in a checkout lane at these stores is already like watching paint dry. You really want to make it slower by having cards rejected in lane?  Time is money. I’d call their bluff.

And are these retailers, who have fought the global brands tooth and nail for ten years going to give the global brands a captured market? Put their only competitors, the PDNs, out of business ? I’m not taking that bet, either.

And why wouldn’t card issuers put a second application on a chip? Sure, it might require a little baksheesh from the PDNs, but this is business. Everything comes down to money. If the PDNs understood that, which I don’t think they do, they’d start talking dollars with the issuers. Will that happen? I’ll bet that it does.

This is a long story. But long story short, EMV will happen when the business people in these organizations figure out who gets to make the money here and how much. Right now the process is being driven and filtered by the technologists. Once the business people figure out which way the money flows, EMV will get implemented. Like everything else in business, it all comes down to money.