Despite reports to the contrary, our experience is that most ISOs acknowledge that EMV is inevitable and have already begun adjusting their purchases of new ATMs to reflect this reality. Year-to-date sales of U.S. ATMs with EMV card readers are already over 70% and are headed towards 80%. What about the remaining 20-30%? What are these ISOs thinking?
Well it turns out that nearly all ISOs who continue to purchase ATMs with magnetic stripe card readers claim that it is their merchant customers either don’t want EMV readers or are not willing to pay the additional cost. This is a real problem. In fact, it may represent an even larger challenge for ISOs than the logistical nightmare of upgrading, replacing or removing nearly 300,000 retail ATMs in the next 30 months.
Merchant reluctance will be time consuming. Reviewing every merchant contract to determine who is responsible for upgrades or replacements is the first step in EMV conversion. Closely related to the legal review is a profitability review of merchant accounts and sites. Most ISOs have completed or at least begun these evaluations. Conversations with merchants about timing and payment for EMV upgrades is the next step in the process. Unfortunately, this is where many ISOs have already gotten bogged down by a lack of merchant education or concern about EMV and liability shift. Having widely ignored PCI and ADA mandates already, merchants are having a hard time believing that EMV will be any different. Educating merchants about the risks of waiting or of operating magnetic stripe ATMs post-liability shift will likely be a time-consuming and frustrating exercise for most ISOs.
Merchant reluctance will be expensive. Regardless of the details of merchant contracts, ISOs will be forced in many cases to finance the upgrade or replacement of ATMs at merchant sites. Presumably these will be the more profitable sites and in exchange ISOs may be able to secure extended contracts with favorable terms to protect their portfolios. However, these decisions will be painful, as EMV costs will not generate additional revenue for ISOs – they are often purely a defensive maneuver. Unlike inexpensive POS devices, ATM EMV upgrade/ replacement will cost between $500 and $2,500 per terminal. In addition, shortages and costs of field service technicians and hardware are likely to grow as we approach the 2016 (MasterCard) and 2017 (VISA) liability shift deadlines. Merchant reluctance to upgrade for EMV will likely be expensive for U.S. ISOs.
Merchant reluctance will result in lost business. Aggressive ISOs have already started discussions with merchants in the hopes of poaching sites from “wait and see” ISOs. However, the risk of lost business is not confined to just higher transaction sites. At locations where both the merchant and the ISO balk at funding EMV upgrade or replacement, the result will likely be a stalemate. As we saw in Canada, these low transaction sites will continue to operate until either processors shut off non-EMV terminals or until a breach occurs. Alternatively, a more aggressive competitor may even poach these merchants, upgrading or replacing hardware in the hope that transactions will increase. Either way, many ISO portfolios will likely shrink as a result of merchant reluctance in the face of EMV.
Merchant reluctance will be result in litigation. Under liability shift, total fraud costs will be passed from the card schemes to the non-EMV link in the transaction chain. Presumably the issuers will begin raining down chip cards on customers later this year, while processors are busy licensing AIDs and sorting out routing challenges to accommodate EMV. Assuming processors continue handling magnetic stripe transactions after liability shift deadlines, ISOs and merchants will be frighteningly exposed. Look for heated legal battles between ISOs and merchants when five and six-figure fraud claims start being doled out by the card schemes.
EMV conversion is a tricky proposition for ISOs. Handled well, it represents a chance to solidify and grow portfolios. Handled poorly, ISOs risk a time consuming, expensive and even litigious civil war with its own customers.
by: Daryl Cornell
U.S. EMV Migration Guide: What You Need to Know
The Guide addresses EMV and why the U.S. is migrating to chip and PIN technology, what you should be doing now to prepare for the October 2016 MasterCard liability shift.