Investing in EMV or Chip-and-PIN Stocks

Halloween is in just two weeks away, which means Americans are about to experience the holiday season in full force.

Sure, Christmas is still months from now, but come November 1st, you won’t be able to buy a pack of gum without hearing “Jingle Bell Rock” stuck on repeat.

For the most part, I’m happy to welcome all the holiday festivities this year. There’s nothing quite like the nostalgia that comes hand in hand with stuffing a turkey, hanging tree ornaments, or listening to the crinkling sounds of wrapping paper as your family and loved ones exchange gifts.

Unfortunately, though, not everything about the holiday season is full of cheer and joy. Many people find this to be the most stressful time of the year, and for good reason, too. Travel gets crazy, budgeting can be difficult, and retail stores become real-life “nightmares before Christmas.”

Technology has so far been a double-edged sword for treating such holiday woes.

On the plus side, e-commerce has significantly driven down foot traffic to brick-and-mortar retail. Not only does this mean stores are becoming less crowded, but consumers are also getting better deals — the reason being big-box retailers are losing much of their pricing power

The benefits of shorter lines and lower prices, though, have arguably been offset by massive security breaches affecting holiday shoppers by the millions.

Last holiday season, Target was hit by hackers, compromising as many as 70 million shoppers. Just a few months later, Home Depot was hit by an attack of similar scale, with 56 million credit cards compromised.

It used to be a concern that putting your credit card number on the Internet wasn’t secure, but today, the physical action of swiping your card has become the greatest risk.

Hot-Potato Payments

As a result of these recent attacks, many American consumers are losing faith in our nation’s current physical credit card infrastructure.

In a recent poll run by CreditCards.com, 45% of shoppers with credit or debit cards said they would either definitely or probably avoid retailers with a history of data breach.

But retailers like Target and Home Depot aren’t solely to blame here. Card issuers like Visa and MasterCard are also largely responsible for our current lack of a secure payment infrastructure.

See, while credit and debit card fraud in the United Stated increased 70% between 2004 and 2010, fraud in the UK was down by 63% in the same period. The reason? The majority of cards issued in Western Europe are implanted with computer chips that encrypt your information and make it more difficult for hackers to steal.

This technology, known as EMV or chip-and-PIN, has actually been around since 1996, but card issuers didn’t want to make the $3 billion investment that was required in the U.S. Likewise, retailers have been hesitant to dish out the collective $2.5 billion required to update their point-of-sale systems.

The scenario has been bit of a Catch-22. Merchants haven’t wanted to invest in point-of-sale devices since there are little to no EMV cards being issued in the U.S., and card issuers haven’t wanted produce EMV cards because there are little to no point-of-sale devices that accept EMV transactions.

But with credit card fraud dramatically increasing and many shoppers now hesitant to swipe their cards at major retailers, the adoption of EMV has become a no-brainer for all concerned parties. This includes issuers, retailers, customers, and the U.S. government as well.

In an effort to speed up the adoption of point-of-sale systems, both MasterCard and Visa have put forth October 2015 deadlines that shift full liability to merchants for fraudulent transactions if their technology is not up to par. The constraints are not identical, but the gist is if merchants use point-of-sale terminals that can’t process EMV transactions, they’ll be liable for any fraud that occurs.

The petroleum industry is getting a little more slack, with an October 2017 deadline, but gas stations will eventually be facing the same liability shift.

Follow the Leader

Now, a lot of folks missed this one in the midst of all the Ebola hysterics last week, but President Obama signed an executive order to speed the adoption of EMV-standard last Friday. The order requires government-issued cards (i.e. Social Security cards) to have secure chip-and-PIN technology embedded in them.

According to the public statement:

“We’re going to begin making sure that credit cards and credit-card readers issued by the United States government come equipped with two new layers of protection: a microchip in the card that’s harder for thieves to clone than a magnetic strip, and a PIN number you enter into the reader just as you do with an ATM. We know this technology works. When Britain switched to a chip-and-PIN system, they cut fraud in stores by 70%.”

Several analysts actually described the executive order as “meaningless,” pointing out that MasterCard’s and Visa’s liability shifts were going to drive adoption of EMV infrastructure anyway.

For instance, Julie Conroy, an analyst with Aite Group, argued, “[The government] is not being a leader because the payment industry is way ahead of them. The government had to do this because if they didn’t upgrade their security, criminals would focus on them as the weakest link in the chain.”

Others felt more positive about the announcement. Director of the EMV Migration Forum Randy Vanderhoof, for one, points out:

“The government issues lots of debit cards for its benefit programs, and therefore by making this statement and putting out the target of January 2015, they’re really leading by example, and saying that the market should be moving over to more secure chip cards as fast as possible.”

All politics aside, the point is there will be widespread adoption of chip-and-PIN technology over the next several years.

And while merchants, card issues, and consumers are all going to benefit from this new infrastructure, it’s really the chipmakers and point-of-sale device manufacturers that will see the greatest amount of profit.

Until next time,

Jason Stutman

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