Starting today, October 1, 2015, a substantial portion of the liability associated with in-store fraudulent credit card purchases shifts from credit card
issuers, such as banks or credit unions, to retail merchants. Credit card companies instituted the shift in a push to force retailers to adopt new EMV
(EuroPay, MasterCard and Visa) chip technology over the traditional magnetic strip readers prevalent in the United States.
EMV chip technology is considered a more secure payment system than traditional credit card magnetic strips. Each magnetic strip contains a single set of
unchanging data that can be replicated and used repeatedly for fraudulent purchases until the card is cancelled. In contrast, a card with an EMV chip
generates a one-time transaction code that cannot be used for any other in-store transaction, limiting the utility of the stolen data. According to the
credit card industry, the adoption of EMV chip technology also will limit fallout from significant companywide data breaches as the breach would yield less
profitable information for hackers.
Credit card companies hope to expedite the new technology rollout through the pending change in liability rules. Under the prior rules, the card issuer
assumed all liability for counterfeit or stolen credit card transactions. Under the new rules starting today, retailers who choose to accept payments via a
credit card’s magnetic strip will be able to do so but may be liable for fraudulent purchases resulting from the use of the magnetic strip on
EMV-chip-enabled cards. Generally speaking, if the card does not contain an EMV chip, the card issuer can be held liable. If the card contains an EMV chip
but the merchant has not adopted EMV chip technology, the merchant can be held liable. Between the two parties, the party with the least EMV-compliant
transaction network will be responsible for the fraudulent transaction.
The new rules likely will generate some confusion over who is liable for specific transactions, as each instance of fraud requires the following factual
determinations, among others:
- What type of card was used in the fraudulent transaction (counterfeit magnetic strip card with data copied from another magnetic strip card, or
counterfeit magnetic strip card with data copied from a chip card)
- Whether the card was EMV-chip-enabled
- Whether the point-of-sale (POS) terminal was EMV-chip-compliant
- If the POS terminal and the card were both EMV-chip-enabled, whether the transaction was a “fallback” transaction in which the magnetic strip was used
despite the EMV chip capability of both the card and POS system
Depending on the answers to each inquiry, either the retail merchant or the issuer will be liable for the fraudulent transaction. The liability analysis
becomes even more complex if chip and PIN technology is part of the transaction.
In order to be deemed EMV-compliant, retailers need to upgrade their POS terminals and review their software to ensure both can process the new technology.
Cost estimates for converting the entire U.S. network range from $8.5 billion to more than $30 billion. Advocacy groups for the retail industry asked for
an extension of the October deadline because some retailers are experiencing delays in procuring the new technology ahead of the looming deadline.
Additionally, the new liability standard calls for the installation of chip and signature technology, as opposed to the more secure chip and PIN
technology. Chip and signature cards require the customer to sign for each credit card transaction. Chip and PIN cards require the customer to memorize a
numerical PIN to authorize the transaction and offer an additional layer of security. Many retailers are concerned that the failure to convert to chip and
PIN technology as part of the EMV transition will place an undue share of fraud liability on the retail merchant handling the in-store transaction. Credit
card companies have responded that the conversion to chip and PIN will be phased in over a period of years to give the U.S. consumer time to adjust.
Starting today, retailers may continue to use the old magnetic strip technology but will be subject to the new liability-shifting rules. Although the cost
of switching to the new technology may be high, the potential liability of failing to make the switch is significant under the new rules. Card issuers are
well on their way to full EMV chip compliance and estimate that two-thirds of U.S. credit cards will contain an EMV chip by the end of 2015, placing the
burden of compliance squarely on the shoulders of retail merchants. Retailers still contemplating converting their networks need to weigh the cost of
adopting the new technology against their potential liability exposure now that the new rules are in effect.