EMV

The relationship between Europe and North America has often been described as a relationship between a parent and child. Europe is the older, experienced parent while North America is the younger, inexperienced child. This certainly does not hold true with every aspect of the European/North American relationship but it is particularly true regarding credit cards and EMV.

Officially known as Europay, MasterCard, Visa or unofficially as chip and pin it is the standard which allows (requires) a credit card transaction to be a pin based transaction as opposed to a signature based transaction. This is accomplished by embedding a microchip into credit cards (creating a 'smart card') meaning new plastic needs to be issued. To 'read' the microchip new technology is required at the point-of-sale meaning legacy equipment needed to be swapped out. Providing new plastic and new equipment requires a significant capital investment from multiple parties hence the introduction of EMV into a new market takes place over a number of years.

Originating in Europe in the mid-90s EMV was borne out of a desire to increase credit card security while ensuring the continued world-wide acceptance of credit cards. To do so the three principals – EuroPay, MasterCard and Visa, created new specifications that created commonality in the credit card space. As an aside, EuroPay merged with MasterCard in 2002 and is no longer a stand-alone entity.

As mentioned, the key benefit to having a credit card transaction be pin based and not signature based is increased security and decreased fraud. Smart cards are very difficult if not impossible to counterfeit – an important tool in reducing credit card fraud. From a cardholder's viewpoint lost or stolen smart cards largely become a nuisance as the cards cannot be used with knowledge of the pin number. However, lost and stolen cards could still possibly be used in a card not present environment as a pin is not required.

Finally, there is a last step commonly called the settlement stage. This occurs when the funds transferred from the card issuer are actually deposited in the account of the merchant who accepted the credit card. It is important to note that even though the funds are deposited in to the merchant account, the card holder still retains the right to declare the transaction as being invalid via a chargeback mechanism. This is unfortunately one of the risks that the merchant bears from the established structure.

Another component of an EMV transaction is its ability (in conjunction with a POS terminal) to have transactions authorized in an off-line setting. What does this really mean? Quite simply should a POS device not be able to obtain connectivity it looks to the smart card for the authorization. If the transaction in question meets the pre-set risk parameters on the chip the transaction is approved. The transaction is then settled when the POS gains connectivity.

The move to bring chip and pin transactions to Canada began with in the fall of 2007 with the impacted stakeholders participating in the Kitchener/Waterloo pilot project. Following the success of the pilot October 2010 was set as the first milestone in regards to a shift in liability. The October date was pushed out to April of 2011 to give both retailers and acquirers additional time to make sure all (or the majority) of POS terminals were capable of processing a smart card transaction.

The liability shift has meant merchants who still have a non-EMV POS device and process a chip enable credit card will be liable for any fraudulent transactions or chargebacks resulting associated with said transaction. Merchants are still not liable for fraud or charge-backs if the acceptance of a chip enabled card using a chip enabled POS device would have still resulted in fraud of a chargeback. Interac (Debit) has set a target date of December 31, 2015 for all Interact transactions to be chip transactions.

The implementation of EMV into the Canadian market was and is one of the most significant changes to take place since the advent of pin based debit. POS devices have had to be replaced to accommodate the new technology and new cards have had to be issued, both costly involved projects. That said, the benefits far outweigh the costs and consumers and merchants will soon forget the challenges of finding a working pen.