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February 3, 2020
Fuel Pump EMV Chip Liability Shift Looms Large
It has been quite some time since the Retail Payments Risk Forum has blogged about the state of the EMV chip in the United States. Perhaps the lack of coverage is a nod to the success and growth of EMV chip issuance and acceptance since the point-of-sale (POS) and ATM liability shifts that began in 2015 and 2016, respectively. The Federal Reserve's newly released payments study found that 57 percent of in-person card payments in 2018 used chip authentication compared to 2 percent in 2015. Talk about phenomenal progress over a three-year period! Yet there is more to do, and 2020 will be a big year for closing a big gap—EMV chip acceptance at the fuel pump, or what the industry generally calls automated fuel dispensers (AFDs).
In October, all of the global card networks' liability shifts will be implemented for AFDs. As a brief reminder, this liability shift means that petrol retailers will now be responsible for incurring the fraud losses on all non-EMV-chip-authenticated transactions initiated by EMV cards at their pumps. According to several industry associations that represent the convenience and petroleum store industry, this liability shift date will be a challenge for many station operators to meet given a limited availability of EMV-compatible AFDs as well as the technicians to install and certify the machines as EMV ready.
Through the years, the Risk Forum has stressed that criminals tend to gravitate to the easy targets when it comes to committing card fraud, or really any fraud in general. Card skimmers at AFDs pulling data off a card's magnetic stripe have been a major problem for decades. I have no doubt that the fraudsters are fully aware of the impending liability shift and will be stepping up their AFDs attacks in 2020 before the window of counterfeit card opportunity closes. Those retailers who are delaying their EMV migration or are unable to migrate by the liability shift date will become giant bulls' eyes. Expected card fraud losses in 2020 for the industry are not inconsequential—one industry association has estimated losses of $451 million. I should also note that the costs faced by the industry to migrate to EMV are also significant, at an estimated $3.9 billion.
After witnessing the successful rush by the industry to implement EMV chip at the POS and ATM, I am confident that the AFD EMV chip implementation ahead of the October liability shift will be a success, but all involved will definitely experience challenges. My confidence stems from the positive momentum I have seen from everyone involved in the payments industry working together for the common good to mitigate card fraud. With counterfeit card fraud losses through June 2019 down by over 60 percent since September 2015, I look forward to seeing even more decreases in counterfeit card fraud following this year's AFD liability shift.
January 20, 2020
We're Number 1! But Why?
A new paper from the Kansas City Fed asks the question, why are U.S. card fraud rates higher than those of other developed countries? Economist Fumiko Hayashi found that even after EMV migration in 2015, the U.S. had a significantly higher in-person card fraud rate than did Australia, France, and the United Kingdom. In all three years studied—2012, 2015, and 2016—the U.S. in-person fraud rate was more than three times higher than that of the other countries (see the chart).
She attributes these differences to three factors:
- The United States had a smaller share of chip transactions. EMV migration in the United States didn't really begin until 2015, compared to years (even decades) earlier for the other countries. According to the Federal Reserve Payments Study, 2 percent of in-person general-purpose card payments used chip authentication in 2015; that share increased to 57 percent in 2018.
- The other three countries use the multi-factor chip-and-PIN verification, which is a stronger method than what U.S. networks use: most chip transactions are chip only. For in-person general-purpose card payments in the United States in 2018, the Federal Reserve Payments Study found that 21 percent (17.8 billion payments) used chip-and-PIN.
- U.S. cardholders are more likely to use credit cards, which typically have higher fraud rates than debit cards.
Hayashi's paper gives a snapshot of the four countries at three points in time. Another approach to doing a country-to-country comparison would be to make a moving picture depicting the aftermath of the adoption of EMV chips for in-person payments. My Retail Payments Risk Forum colleague Doug King, in a paper published in June 2019, looked at the change in in-person fraud for Australia, France, and the United Kingdom and found that fraud rates for in-person transactions dropped after chip-and-PIN implementation. You can see in the figure above that U.S. in-person card fraud rates declined from 2015 to 2016, over the time of EMV implementation here.
Keep in mind that this post is a simplification of two complex papers. For example, Hayashi also analyzed remote card fraud rates. And Doug included some data from other nations. If you want more information, the Federal Reserve Payments Study has reported details on fraud for noncash payments in the United States, cards included, and also authorization methods for in-person general-purpose card payments (see figure 6 in the 2019 Federal Reserve Payments Study). I invite you to read these reports.
July 15, 2019
The Future of Fraud in a Post-EMV Chip Environment
"Doug: Your conclusion has me worried about credit-push in an environment where payments are irrevocable." I received this brief email a few days after my latest paper was published on the Atlanta Fed website. In this paper, I explore fraud trends in countries with a fully mature, or close to it, EMV chip card environment—trends we are likely to see in the United States as our EMV chip card implementation matures.
When the topic of EMV chip card fraud comes up, the conversation nearly always makes its way to the documented shift from counterfeit card fraud to card-not-present (CNP) fraud. While that is a fair and valid conversation, times are changing, and we just may need to refocus the fraud conversation, as this email indicates—my emailer was referring to credit-push payments and the fraud that can happen, and is happening, in this environment.
Data clearly show that when countries such as the United Kingdom, France, and Australia migrated to EMV chip cards, CNP fraud rose—in some instances, dramatically. And where the data are available, we can see that the fraud rate for CNP transactions also initially rose. But over the last several years something interesting has happened. Both absolute CNP fraud and CNP fraud rates are declining in some of the countries. While these countries did not have many CNP fraud prevention techniques and tools at their disposal when they first migrated to EMV chip cards, the technology is catching up and they have more tools now. If there was any benefit for the United States from being an EMV laggard, perhaps this is it: we are better equipped to deal with CNP fraud.
But back to push payments. Authorized push payment (APP) fraud, which is a form of credit-push fraud, is a growing problem. In the United Kingdom, the real-time payment system is being used extensively to carry out this type of fraud. Just as other countries didn't have many tools to fight CNP fraud in early EMV chip adoptions, we don't have all the tools yet to mitigate APP fraud.
At the heart of APP fraud is business email compromise, which we've covered in this blog and which was the featured topic in the Atlanta Fed's most recent Economy Matters podcast episode . To read more about this particular fraud trend and other trends the U.S. payments industry should be wary of as our EMV chip card environment matures, be sure to read the paper .
Back to the email I received—it was short, but my reply was even shorter: "You should be worried."
April 1, 2019
Contactless Cards: The Future King of Payments?
Just over two years ago, my colleague Doug King penned a post lamenting the lack of dual interface, or "contactless," chip payment cards in the United States. In addition to having the familiar embedded chip, a dual interface card contains a hidden antenna that allows the holder to tap the card on or wave it near the POS terminal. This is the same technology—near field communications (NFC)—that various pay wallets inside mobile devices use.
Doug is now doing his daily fitness runs with a bigger smile on his face as the indicators appear more and more promising that 2019 will be the year of the contactless card. Large issuers have been announcing plans to distribute dual interface cards either in mass reissues or as a cardholder's current card expires. Earlier this year, some of the global brand networks launched advertising campaigns to make customers aware of the convenience that contactless cards offer.
So why have U.S. issuers not moved on this idea before now? I think there have been several reasons. First, for the last several years, financial institutions have focused a lot of their resources on chip card migration. Contactless cards will create an additional expense for issuers and many of them wanted to let the market mature as it has done in a number of other countries. They were also concerned about the failure of contactless card programs that some of the large FIs introduced in the early 2000s—most merchants lacked terminals capable of handling the technology.
The EMV chip migration solved much of the merchant terminal acceptance problem as the vast majority of POS terminals upgraded to support EMV chips can also support contactless cards. (While a terminal may have the ability to support the technology, the merchant has to enable that support.) Visa claims that as of mid-2018, half of POS transactions in the United States were occurring at terminals that were contactless-enabled. Another factor favoring contactless transactions is the plan by major U.S. mass transit agencies to begin accepting contactless payment cards. According to the American Public Transportation Association's 2017 Ridership Report, there were 41 transit agencies in the United States with annual passenger trip volumes of over 20 million trips.
Given that consumer payments is largely a total sum environment, these developments have led me to ask myself and others what effect contactless cards will have on consumers' use of other payment forms—in particular, mobile payments. As my colleagues and I have written numerous times in this blog, mobile payments continue to struggle to obtain consumer adoption, despite earlier predictions that they would catch on quickly. There are some who believe that the convenience of ubiquity and fast transaction speed will favor the dual purpose card. Others think that the increased merchant acceptance of contactless will help push the mobile phone into becoming the primary payment form.
My personal perspective is that contactless cards will hinder the growth of in-person mobile payments. There are those who claim to leave their wallet at home and never their phone, and they will continue to be strong users of mobile payments. But the reality is that mobile payments are not accepted at all merchant locations, whereas payment cards are practically ubiquitous. While I am a frequent user of mobile payments, simply waving or tapping a card appeals to me. It's much more convenient than having to open the pay application on my phone, sign on, and then authorize the transaction.
Do you believe the adoption of contactless cards by consumers and merchants will be as successful as it was for EMV chip cards? And do you think that contactless cards will help or hinder the growth of mobile payments? Let us hear from you.
By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed