Saturday, May 31, 2014

The Regressive movement to Europay, MasterCard, Visa, (EMV) Payments

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

[2] First Data Corporation (Morea, Dom); EMV in the U.S.: Putting It into Perspective for Merchants and Financial Institutions; (2011); p. 12. See

[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

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