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Wednesday, August 10, 2011

Say Hello to Chip and Pin

By Adrian Lane

No, it’s not a Penn & Teller rip-off act – it’s a new credit card format. On August 9th Visa announced that they are going to aggressively encourage merchants to switch over to Chip and Pin (CAP) ‘smart’ credit cards. Europay-Mastercard-Visa (EMV) developed a smart credit card format standard many years ago, and the technology was adopted by many other countries over the next decade. In the US adoption has never really happened. That’s about to change, because Visa will give merchants a pass on PCI compliance if they adopt smart cards, or let them assume 100% of fraud liability if they don’t.

Why the new push? Because it helps Visa’s and Mastercard’s bottom lines. There are a couple specific reasons Visa wants this changeover, and security is not at the top of their list. The principal benefit is that CAP cards allow applications to be installed and run on the card. This opens up new revenue opportunities for card issuers, as they bolster affinity programs and provide additional card functionality. Things like card co-branding, recurring payments, coupons, discounted pricing from merchants, card-to-card gifting, and pre-paid transit tokens are all examples. Second, they feel that CAP opens up new markets and will engender broader use of the cards. The smart card industry in general is worried about loss of market share to smart phones that can provide the same features as CAP-based smart cards. In fact we see payment applications of all types popping up, many of which are (now) sponsored by credit card companies to avoid market share erosion. Finally, the card companies want to issue a single card type, standardizing cards and systems across all markets.

Don’t get me wrong – Security absolutely is a benefit of CAP. ‘Smart’ credit cards are much harder to forge, offering much better security for ‘card present’ transactions, as the point-of-sale terminal can electronically validate the card. And the card can encrypt data locally, making it much easier to support (true) end-to-end encryption so sensitive data is not exposed while processing payments. Most smart cards do not help secure Internet purchases or card-not-present transactions over the phone. What scares me about this announcement is that Visa is willing to waive PCI DSS compliance for merchants that switch 75% or more of their transaction to CAP-based smart cards! Vissa is offering this as an incentive for large merchants to make the change. The idea is that the savings on security, audit preparation, and remediation will offset the costs of the new hardware and software. Visa has not specified whether this will be limited to the POS part of the audit, or if they mean all parts of the security specification, but the press release suggests the former.

Merchants have resisted this change because the terminals are expensive! To support CAP you need to swap out terminals at a hefty per-terminal cost, upgrade supporting point-of-sale software, and alter some payment processing systems. Even small businesses – gas stations, fast food, grocery stores, etc. – will require sizable investment to support CAP. Pricing obviously varies, but tends to run about $1,000 to $1600 per terminal. Small merchants who are not subject to external auditing will not benefit from the audit waiver that can save larger merchants so much, so they are expected to continue dragging their feet on adoption.

One last nugget for thought: If EMV can enforce end-to-end encryption, from terminal to payment processor, will they eventually disallow merchants from seeing any card or payment data? Will Visa fundamentally disrupt the existing card application space?

–Adrian Lane