In just under six months, a behind-the-scenes switch in the payments industry will change the way U.S. consumers shop and could bring wider acceptance for Apple Pay and its competitors.
Beginning in October, liability for transactions with fraudulent credit and debit cards will shift from the card companies to retailers, if the retailers haven’t invested in terminals that accept chip-based cards. The chip cards are already being sent from banks to customers, and some stores have them in place, but much is still up in the air.
At this week’s Transact 15 expo in San Francisco, a gathering of companies in the electronic payments industry, everyone has questions and there are few answers. Could the shift be delayed, will banks mandate PIN numbers instead of signatures for purchases with the new cards, and will cybercriminals just shift their attention online?
The switch to chip-based cards happened a decade ago in many European countries and is now common around the world, but the U.S., with its complex financial and retail system, has lagged. No one had wanted to put the investment into new cards and new terminals.
The Target transition
And then Target happened.
The breach of Target’s payment system last year, which exposed the card numbers of tens of millions of consumers, is credited by many as the final push the industry needed to finally make the switch.
The new chip cards add a digital signature to transactions that lets the payment network know that the card being presented is the official one and not a fake—magnetic stripes don’t have this ability and have proved vulnerable to copying.
But to accept the cards, retailers have to upgrade their payment terminals.
The largest retailers in the nation are already well prepared, said Rod Hometh, senior vice president of strategic development at Ingenico, a credit card machine retailer. They’ve been preparing for the last two years and even large regional retailers are expected to be ready at or near the deadline, he said, but most small businesses are well behind.
Pain at small businesses
This is partly due to cost and partly to lack of awareness of the shift.
With a small handheld terminal costing about the same as a smartphone, upgrading can cost thousands of dollars for small businesses, and there are many such businesses in the county.
Of the 6 million retail terminals in the U.S., a million of them account for 95 percent of all transactions. Small retailers make up the remaining 5 million terminals.
Some retailers are taking the opportunity to upgrade their entire systems to benefit from new technology and software that has been introduced in recent years, said Kevin Colaco, innovation mentor at Retail Cloud, a California start-up that offers a free point-of-sale system with premium add-ons.
An advantage of this approach is that the new terminals also include readers for NFC [near-field communication] systems like Apple Pay, Google Wallet and Samsung Pay.
For consumers eager to adopt mobile payments, the switch could bring wider acceptance. But the new cards are also expected to bring some confusion. In most countries, chip cards also ushered in an era where PINs, rather than signatures, are used to verify a transaction. Many banks and retailers are expected to stick with signatures, but some automated terminals such as gas pumps might start requiring PINs.
With six months to go, card issuers appear resolute on the October 1 deadline and most people involved agree that a further delay would cause a loss of faith in the switchover.