August 10, 2009
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U.S. Credit Card Technology being Eclipsed?, Pt.2
Are we dragging our feet?It turns out that there are some fundamental reasons why it would be very difficult the the US to just switch over to the "Chip & PIN" technology. Probably the biggest is the fragmented system the US has evolved into. Because American industry is so staunchly opposed to government control, there is little unity in these "United States". We have all these players like credit card associations (like VISA, MC and Amex), all these issuing banks (like BOA, Chase, Cap1 and CitiBank), all these payment processors (like Heartland, Micros, Vital, FirstData and Paymentech) and then millions of independent merchants (all businesses who accept credit cards). The biggest hurdle would be to sell all those merchants (millions, perhaps) that would have to convert all their credit card readers to new and more expensive technology. In Europe (and most countries) government agencies have authority to mandate such things.
The financial impact on merchants would be substantial. For every credit card reader they have, they might have to pay triple the cost that they have already paid for the old one. Even though this would be a God-send for the credit card associations (if they could reduce credit card fraud to that of Europe, they could save maybe as much as $47 billion every year on fraud losses. Of course, that doesn’t help the merchant very much. Another big contrast is the much greater need for Europe (and most other developed countries) is that their transactions aren't real-time. Because readers and local terminals operate off-line all day, credit card transactions aren’t verified at time of sale. Not until midnight (posting) can fraud be detected. The vulnerability alone almost dictates that Europe must do it this way. The same is true in Canada where the huge processor, Monaris, pretty-much has to run the whole show. Substantial time and effort must go into straightening out the last few days.
At least, in the US most transactions are real-time and fraud can be much more easily stopped at POS (point of sale) and some criminals nabbed on the spot. In the past, The US made much greater progress than Europe. That’s all changing now. With better security come smarter rats. Even though the number of isolated incidences has been reduced to almost nil, the few that get through are huge. The black market now offers dirt-cheap counterfeits in blocks of 100 on-line: $276 million worth of product with the potential of $5.3 billion in yield. Chip and PIN cards are largely immune.