EMV and the Changing Payment Space: the BasicsBy Adrian Lane
This is the second post in our series on the “liability shift” proposed by EMVCo – the joint partnership of Visa, Mastercard, and Europay. Today we will cover the basics of what the shift is about, requirements for merchants, and what will happen to those who do not comply. But to help understand we will also go into a little detail about payment providers behind the scenes.
To set the stage, what exactly are merchants being asked to adopt? The EMV migration, or the EMV liability shift, or the EMV chip card mandate – pick your favorite marketing term – is geared toward US merchants who use payment terminals designed to work only with magnetic stripe cards. The requirement to adopt terminals capable of validating payment cards with embedded EMV compliant ‘smart’ chips. This rule goes into effect on October 1, 2015, and – a bit like my tardiness in drafting this research series – I expect may merchants to be a little late adopting the new standards.
Merchants are being asked to replace their old magstripe-only specific terminals with more advanced, and significantly more expensive, EMV chip compatible terminals. EMVCo has created three main rules to drive adoption:
- If an EMV ‘chipped’ card is used in a fraudulent transaction with one of the new EMV compliant terminals, just like today the merchant will not be liable.
- If a magnetic stripe card is used in a fraudulent transaction with a new EMV compliant terminals, just like today the merchant will not be liable.
- If a magnetic stripe card is used in a fraudulent transaction with one of the old magstripe-only terminals, the merchant – instead of the issuing bank – will be liable for the fraud.
That’s the gist of it: a merchant that uses an old magstripe terminal pays for any fraud. There are a few exceptions to the basic rules – for example the October date I noted above only applies to in-store terminals, and won’t apply to kiosks and automated systems like gas pumps until 2017.
So what’s all the fuss about? Why is this getting so much press? And why has there been so much pushback from merchants against adoption? Europe has been using these terminals for over a decade, and it seems like a straightforward calculation: projected fraud losses from card-present magstripe cards over some number of years vs. the cost of new terminals (and software and supporting systems). But it’s not quite that simple. Yes, cost and complexity are increased for merchants – and for the issuing banks when they send customers new ‘chipped’ credit cards. But it is not actually clear that merchant will be free of liability. I will go into reasons later in this series, but for now I can say that EMV does not fully secure the Primary Account Number, or PAN (the credit card number to you and me) sufficiently to protect merchants. It’s also not clear what data will be shared with merchants, and whether they can fully participate in affiliate programs and other advanced features of EMV. And finally, the effort to market security under threat of US federal regulation masks the real advantages for merchants and card brands.
But before I go into details some background is in order. People within the payment industry who read this know it all, but most security professionals and IT practitioners – even those working for merchants – are not fully conversant with the payment ecosystem and how data flows. Further, it’s not useful for security to focus solely on chips in cards, when security comes into play in many other places in the payment ecosystem. Finally, it’s not easy to understand the liability shift without first understanding where liability might shift from. As these things all go hand in hand – liability and insecurity – so it’s time to talk about the payment ecosystem, and some other areas where security comes into play.
When a customer swipes a card, it is not just the merchant who is involved in processing the transaction. There are potentially many different banks and service providers who help route the request and who send money to the right places. And the merchant never contacts your bank – also know as the “issuing bank” directly. When you swipe your card at the terminal, the merchant may well rely on a payment gateway to connect to their bank. In other cases the gateway may not link directly to the merchant’s bank; instead it may enlist a payment processor to handle transactions. The payment processor may be the merchant bank or a separate service provider. The processor collects funds from the customer’s bank and provides transaction approval. Here is a bit more detail on the major players.
- Issuing Bank: The issuer typically maintains customer relationships (and perhaps affinity branding) and issues credit cards. They offer affiliate branded payment cards, such as for charities. There are thousands of issuers worldwide. Big banks have multiple programs with many third parties, credit unions, small regional banks, etc. And just to complicate things, many ‘issuers’ outsource actual issuance to other firms. These third parties, some three hundred strong, are all certified by the card brands. Recently cost and data mining have been driving some card issuance back in-house. The banks are keenly aware of the value of customer data, and security concerns (costs) can make outsourcing less attractive. Historically most smart card issuance was outsourced because EMV was new and complicated, but advances in software and services have made it easier for issuing banks. But understand that multiple parties may be involved.
- Payment Gateway: Basically a leased gateway linking a merchant to a merchant bank for payment processing. Their value is in maintaining networks and orchestrating process and communication. They check with the merchant bank whether the CC is stolen or overdrafted. They may check with anti-fraud detection software or services to validate transactions. Firms like PayJunction are both gateway and processor, and there are hundreds of Internet-only gateways/processors.
- Payment Processor: A company appointed by a merchant to handle credit card transactions. It may be an acquiring bank or a designated service provider that deposits funds into merchant accounts. They help collect funds from issuers.
- Acquiring Bank: They provide a form of capital to merchants by floating payment and then reconciling customer payments and accept deposits on the back end. Many process credit and debit payments directly; others outsource that service to their own payment processor. They also accept credit card transactions from card issuing banks. They exchange funds with issuing banks on behalf of merchants. Basically they handle transaction authorization, routing, and settling. The acquirer is really the merchant’s partner, and assumes the risk of merchant insolvency and non-payment.
- Merchant Bank: The merchant’s bank. Usually the same as the acquiring bank.
- Merchant Account: A contract between the merchant and the acquiring bank. The arrangement is actually a line of credit.
- Card Brand: Visa, Mastercard, AmEx, and similar. Sometimes called an ‘association’.
- ISO: Independent Sales Organizations for various banking relationships. They are not a card brand, but are vouched for by the brand as an official ‘associate’, and authorized to provide third-party support services for issuance, point-of-swipe devices, and acquiring functions. These firms are part of the association, usually with direct banking relationships.
These are the principal players. Our next post will cover data flow on the merchant side and talk about some security issues that persist despite EMV.