Earlier in this blog (See Security and Payment Hubs), I wrote what I believe to be a
fundamental truth about expenditures to prevent fraud, namely, if firms spend
more to prevent fraud than they suffer in losses, they commit an economic folly.
Certainly the projected expenses for converting the US to EMV exceed the cost
of fraud significantly.
This blog shows that conversion to EMV far exceeds the
amount of card present fraud existent in the US (EMV does nothing to stop card
not present (CNP) fraud). The blog also shows
that prevention of fraud has nothing to do with the expected conversion, and
(not surprisingly) everything to do with an expected huge windfall profit for
the card processing firms.
The Federal Reserve estimated the value of fraud in the US
at the end of 2012 was 6.1 billion dollars[1].
65% of that was fraud committed with general purpose cards. That leaves $4
billion in general purpose card fraud of which half was CNP fraud. So there was
$2 billion dollars of fraudulent transactions in the US in 2012 when the card
was present. First Data Corporation estimates costs of $8 billion to implement
the EMV solution in the US[2].
Thus, EMV implementation costs 4 times
the amount of actual card present fraud in the US.
Why would card processing companies spend that much more to
prevent fraud then what actually exists? The reasons for the folly follow:
· EMV does not pay that much for the conversion;
retailers will pay the lion’s share, and banks (issuing the more expensive
cards) will pay most of the rest.
·
Those retailers that do not comply will receive
huge fines and penalties.
The card processing companies will need those fees to make
up for the losses they suffered when congress restricted the amount of
interchange fees. Issuers received $48 billion dollars in interchange fees in
2009 and received approximately half that amount once the Durbin amendment went
in to effect[3].
To make up for the loss of $24 billion dollars, merchants
will become liable for fraudulent transactions made with an EMV card in a non-compliant
merchant shop; the fines for non-compliance will make up the rest along with
excessive charges for very small value transactions.
The conversion makes money for a slew of other parties
including point of sale equipment manufacturers, card manufacturers, software developers,
and a host of others.
I submit honest reader(s) that retail transaction processing
is nothing more than a natural monopoly.
The Durbin amendment made the issuing banks a de facto monopoly
requiring all to charge the same fees instead of requiring each issuing bank to
charge their own fee without collusion with payment networks or other issuers.
So EMV leaves us in the worst possible world. We pay too
much for transactions; we do not use the payment system provided by the Federal
government; and the system we do use is wide open for attacks. EMV is a boondoggle, but big lobby money
assures our congress will look the other way.
[1] Federal Reserve System; The
2013 Federal Reserve Payments Study Recent and Long-Term Payment Trends in the
United States: 2003 – 2012 Summary Report and Initial Data Release;
(December 2013); p.32 see http://www.frbservices.org/files/communications/pdf/research/2013_payments_study_summary.pdf
[2] First Data Corporation (Morea,
Dom); EMV in the U.S.: Putting It into Perspective for Merchants and
Financial Institutions; (2011); p. 12. See http://www.firstdata.com/downloads/thoughtleadership/EMV_US.pdf
[3] Zhu Wang; Economic
Quarterly Volume 98, Number 3รณ Third Quarter 2012 Pages 159 - 183
Debit Card Interchange Fee Regulation: Some
Assessments and Considerations; see http://www.richmondfed.org/publications/research/economic_quarterly/2012/q3/pdf/wang.pdf
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