Chip and Quill: How EMV Will Increase Card Fraud in the U.S

There's a price to pay for being last to the global EMV party.

We’ve got a problem. A big one, actually.

EMV is going to increase card fraud in the U.S.

“Poppycock!” you say. “Jabberwocky!” you chortle. “EMV chips are much safer than magnetic stripes!”

Turns out there’s a price to pay for being last to the global EMV party -- and a high toll for doubting U.S. consumers’ ability to use PINs rather than signatures when EMV arrives in 2015.

Let me explain.

First, while the U.S. accounts for 25 percent of global card volume, it attracts 50 percent of all card fraud -- because we still rely on magnetic stripes and signatures in cursive to secure and verify card transactions.

Fun fact #1: Cursive was invented to prevent lifting your quill from the page and blotting ink all over your scroll. I’m not kidding. In response to better pen and ink technologies developed decades ago (not to mention word processing), schools are finally phasing out instruction in cursive writing.

Fun fact #2: In a very recent non-scientific study conducted only by me, I concluded that humans are incapable of reproducing signatures on point-of-sale (POS) terminals that don’t draw their sobriety into question -- not that it matters since no one’s checking them anyway. And since no one’s checking them, signatures are not a reliable source of identification, and they are completely useless in preventing lost-and-stolen card fraud.

Fun fact #3: We know from other countries’ experiences that while EMV will reduce counterfeit card fraud, it will also push fraudsters to the next weakest link: online (card-not-present) payments.

According to Aite, while counterfeit card fraud in the U.S. will fall $1.8 billion (-51 percent) to $1.77 billion between 2015 and 2018 due to EMV chips, online card (card-not-present or CNP) fraud will jump $3.3 billion (+106 percent) to $6.4 billion. That’s a projected net card fraud gain of $1.5 billion post EMV. This seems like a poor return on the $8 billion issuers and merchants are spending to deploy EMV.

And though counterfeit card fraud will be blunted by EMV, lost-and-stolen card fraud will remain unchecked in the U.S., as most issuers are going to market with chip-and-signature as the primary cardholder verification method (CVM) for their EMV cards. In fact, because of this, Aite projects lost-and-stolen card fraud to approach $1 billion by 2018.

Put another way, we’re leaving $1 billion of preventable card fraud on the table by migrating to “chip-and-quill” rather than chip-and-PIN EMV.

Even if U.S. issuers were to migrate directly to chip-and-PIN EMV next year, the approaching tsunami of CNP fraud will still drive a $500 million net gain in card fraud in the U.S. thru 2018, according to Aite’s predictions.

Some issuers may be cynical and point out that CNP fraud liability is borne by the merchant, so it won’t be the issuer’s problem. But that discounts the hassle and headache of chargebacks, and ignores the fact that we’re all affected as individual cardholders.

And this is why issuers are faced with a three-fold mandate.

First, forget about signatures. Americans are capable of using PINs to verify and secure EMV card transactions.

Second, tokenize now. Apple Pay, Visa Checkout, and other tokenization efforts will command impressive returns against the rising tide of CNP fraud by replacing card account numbers with digital tokens that are useless if accessed or breached.

Third, deputize your customers in the fight with real-time transactional alerts, and consider risk-based authentication schemes like Visa’s 3-D Secure.

To doubt the American consumer’s ability to PIN instead of sign is both silly and costly, especially when the real learning curve will be mastering the “dip and stay” of EMV terminals in a population trained to “dip and yank” at ATMs and gas stations across the country. That’s going to be fun to watch.

Lee Wetherington, AAP, is Director of Strategic Insight for ProfitStars, a division of Jack Henry & Associates. He directs the development of insight and strategy for the financial services industry at large. To this end, he creates programs, presentations, and articles ... View Full Bio