Tom Martin talked with Steve Kelly, executive vice president, marketing and sales at Lexington-based Central Bank to find out how one bank has transitioned to EMV or “chip” credit and debit cards. EMV stands for Europay, MasterCard, Visa, the three companies that created the standard.
Click here to hear the audio version of the interview: http://www.kentucky.com/news/business/article45076461.html
Q: What is the difference between the familiar magnetic stripe card and the new “chip” card?
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A: Consumers will notice that the new card looks a little different because there is a small silver chip on the front, but the familiar magnetic “mag” stripe is still on the back. The card can still be used either way. It can be swiped the way the consumer always has or “dipped,” meaning inserted in the bottom of the terminal to use the chip technology.
Q: Will the mag stripe on the back of the card disappear with the next generation of cards?
A: Eventually we will shift to the newer technology and will not need the mag stripe.
Q: What makes the chip card more secure?
A: The mag stripe contains information about you on the back. And when you swipe that, that information is transferred to the terminal, which authenticates it and approves the transaction. The chip is more secure because it generates a one-time code and it’s only used uniquely with each transaction. Because each transaction gets a new code, it’s a preferable technology from a fraud prevention standpoint.
Q: This chip-based card technology has been adopted in every global market outside the United States. But although the U.S. is the world’s single largest user of payment cards and even though almost half of the world’s credit fraud happens in this country, we’ve been late in coming around to this technology. Why the delay and what finally prompted the change to the chip card?
A: As you say, Europe has had chips for a number of years. In the U.S., we were not having quite the same issues they were and there was reluctance on the part of a lot of merchants to invest in the new technology because it meant new programming and new terminals. They didn’t want to bear that cost. And the banks didn’t want to bear the cost strictly on their side. It had to be a partnership. I think we began to see big movement as we began to note some of the big box retailers and their frauds. Target is well-documented. Home Depot is another one. T.J. Maxx.
All of a sudden you were seeing millions and millions of transactions at a big box that were impacted by a fraud issue that would never have occurred had they been using chips. And that was a huge impetus to begin to shift. It took a little while to get everyone on the same page, and we’re still just in the beginning steps. According to Visa, around 40 percent of cards issued in the U.S. have the chip. 40 percent doesn’t sound like much but that’s 300 million chip cards. There’s a scramble to obtain the chip plastics. Banks are competing to try to get their cards issued as quickly as they can to comply with the regulation that took effect last October. The backbone of that regulation says if you’re using a chip card and the merchant accepts the chip card, meaning they have both the terminal and the software, the merchant does not bear any liability if the transaction is fraudulent. That’s the way it’s always been. The liability has always been borne by the financial institutions. However, if the merchant has not made a move towards the new technology, doesn’t have either the software or the hardware and they accept the card that has to be swiped and it’s fraudulent, then they absorb the cost of the fraud.
Q: Have businesses found that liability difficult to live with and what were the implications for Central Bank?
A: The majority of our debit and credit cards today have been reissued as chip, and new debit and credit cards are going to be chip cards. About 35 percent of merchants have made the switch. It’s all driven by the software. So, when you go to the grocery store, almost in all cases they want you to use the chip. Same thing is true in your big boxes, stores that have substantial volume. The big holdouts that we’re seeing locally are restaurants. Most restaurants have not made the change and we’re being told don’t plan to. They don’t believe they’re going to be the target of fraud. It’s somewhat more challenging because with the chip technology, your server has to bring a point-of-sale terminal to your table so you can use your card. Until that issue is solved, most restaurants probably are still going to stick with the “swipe” card. So, as long as we have major segments of industries still swiping, then we’re going to have to issue cards that allow you to swipe.
Q: I know that you can’t speak for all banks, but was it costly for Central Bank to make the transition to EMV technology? And does the bank absorb these costs or are they passed through to the customer?
A: Yes, as you might suspect because there’s a computer chip on the card, the plastic itself is more expensive than the standard plastic with the mag stripe. However, we have seen fraud reduced since the cards were implemented. And that’s the cost savings to us. We’re not passing along a cost to the consumer because frankly, if you charge the consumer to be more secure and more safe, they’re going to be reluctant to take that step. It’s in their best interest and certainly the financial institution’s to be safer. So, there’s no cost to the consumer. Where there is some cost being borne is at the merchant level because the merchant has to have a point-of-sale terminal that will accept the chip and it’s a more expensive terminal than the old ones. They also have to have the programming that allows the chip to be processed. They’ve not had the fraud expense in the past. The banks have. Now, they are faced with having that cost if they don’t implement the chip technology.
Q: What about mobile payment readers like Square? I’m thinking of very small businesses; farmers market merchants, for example. Will chip cards work with these devices and do merchants using Square have to upgrade?
A: I’m familiar with some restaurants in town as well as the farmers market using Square. They’re still swiping. They’ve not gone to the chip technology. Square is chip capable but it’s still a decision on the part of the individual merchant or industry segment whether they’re going to invest in the programming to be fully chip compatible.
Q: Has the shift to a more cashless society impacted Central Bank in any way?
A: It is absolutely impacting the bank. We are seeing tremendous growth in the number of transactions that a customer does on a daily, weekly and monthly basis. As the number of transactions has gone up average dollar volume is actually declining because they’re smaller transactions. They can use the card in more places. And they’re using their mobile device to check balances. The average consumer comes in one of our branches 3 times a month. They look at their account through their online banking device maybe 12 to 15 times a month. On mobile, they will look at their device 41 times a month. In Europe and the rest of the world, the average consumer writes 5 checks a year. In the United States, the average consumer writes 5 checks a month. But we’re going to catch up very quickly now with the shifts towards chips and Apple Pay and the sale of mobile devices.
Q: Is there evidence that this technology is making us better at managing our accounts?
A: Absolutely. People are doing a better job. One of the stalwarts of the banking industry for years has been overdraft protection because people didn’t want to bounce a check or they didn’t want to have a debit card transaction denied. We have seen a steady decline in the number of overdrafts over a period of years. Customers can check the balances. There are fewer checks being written. They have more electronic transactions, which post faster. People are simply managing their money better.
Tom Martin’s Q&A appears every two weeks in the Herald-Leader’s Business Monday section. This is an edited version of the interview. To listen to the interview, find the podcast on Kentucky.com. The interview also will air on WEKU-88.9 FM on Mondays at 7:35 a.m. during Morning Edition and at 5:45 p.m. during All Things Considered.