Problems Hinder EMV Use in US

Joe Stanganelli, Founder and Principal, Beacon Hill Law | 12/22/2011 | 9 comments

Joe Stanganelli

Despite the stupidity they regularly encourage, Americans' credit cards are on the verge of becoming a whole lot smarter.

EMV cards -- also known as "smartchip" and "chip and PIN" cards -- are credit cards that use smartcard technology instead of the "swipe-the-stripe" standard invented in the 1960s.

Americans are almost exclusively familiar with magnetic stripe credit cards. Meanwhile, people in Europe, Asia, and, well, pretty much the rest of the world use credit cards with EMV ("Europay, Mastercard, Visa") technology.

Unlike magnetic stripe cards, EMV-enabled cards uniquely encrypt transaction data for each use. This makes them substantially more secure, because it is much harder for skimmers to steal the card data.

What's more, most EMV-enabled cards are dually enabled with magnetic stripes, accommodating people from other countries traveling in the US. Meanwhile, US travelers often have difficulties using their credit cards abroad.

These compatibility issues may soon be a thing of the past if major financial service multinationals have their way.

Since this past summer, credit card companies have been making a huge push to encourage US retailers and ATMs to accept EMV cards over the next few years. Visa is being particularly aggressive, offering to waive fees for US retailers that accept EMV-enabled cards -- while refusing to offer fraud protection to those that do not switch over by 2013. By 2015, all US retailers accepting Visa will have to accept EMV cards. (At least, that's Visa's goal.)

Banks, too, are going along with the EMV push in the US. Wells Fargo, JPMorgan Chase, and US Bank already offer EMV-enabled cards to qualifying American customers who travel abroad. A month ago, Bank of America Merrill Lynch announced that it will begin offering EMV-enabled credit cards early next year to US customers who travel abroad.

Historically, however, Americans have been reluctant to do things the way the rest of the world does them (for example, the metric system). And here, too, there is some resistance.

Part of the reason is security. It may have advantages over magnetic stripe cards, but EMV is far from a perfect technology. It has several security weaknesses of its own. In 2010, a group of researchers at the University of Cambridge released devastating findings in a paper called "Chip and PIN is Broken." In the paper, the Cambridge researchers reported multiple EMV security vulnerabilities. Perhaps most appallingly, they found that "the proceedings of the PIN verification step are never explicitly authenticated."

The researchers went on to discuss myriad attacks on the UK's chip and PIN system that succeeded by way of a man-in-the-middle device that intercepts communications signals and tricks the terminal into acting as if the customer's PIN were verified. Little evidence of these attacks is typically available by the time a cardholder reports the fraud. These security issues are compounded by problematically bureaucratic dispute resolution processes. Many defrauded UK cardholders have their refund requests denied by card issuers, whose records show -- quite incorrectly -- that the cardholder's PIN was used and verified. These findings are hardly encouraging.

According to the researchers, the US Federal Reserve should resist pressure from banks to move to EMV until a satisfactory solution to EMV's security woes is published. "Itís not reasonable for the smart card industry to foist a broken framework on the US banking industry and then leave it to individual issuer banks to come up with patches."

Infrastructure is another obstacle to widespread US adoption. NFC technology is still fairly nascent for US retailers, and it could take a lot of time for loyalty programs to convince US consumers to accept a new EMV standard. Julie Conroy McNelley, a senior analyst at Aite Group's retail banking practice, says "there's no way" Visa can reach its 2015 EMV goal.

It remains to be seen precisely how EMV adoption will go and, given the weaknesses, whether a different technology could come along in the US or elsewhere to fix the EMV problems. But as Conroy McNelley concedes, "EMV is a heck of a lot better than what we have right now."

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