Will the U.S. be ready with secure chip cards and payment terminals?

Adoption is either 'impressive' or 'so behind,' depending on whom you ask

Only about half of the 12 million merchant payment terminals in the U.S. will be converted to accept more secure smart credit and debit cards and NFC-ready smartphones by the end of 2015, according to financial officials working to support the conversion.

There's wide disagreement over whether that 50% adoption rate is happening quickly enough, given the high rate of fraud with older magnetic stripe credit cards still widely used in the U.S.

Matt Barr, MasterCard senior vice president of U.S. emerging payments, recently said in an interview that the current rate of smart card adoption in the U.S. is "impressive" with "very exciting momentum."

But Jordan McKee, an analyst at 451 Research, said Tuesday that the U.S. is behind the rest of the world in using smart cards and will continue to lag for years.

"Everybody is so behind now [in converting to smart card payments] and it's bad," McKee said. "It's definitely a far-reaching issue, and it's not just the fault of merchants, but also point-of-sale" terminal suppliers and others.

Last October, the Payments Security Task Force, a group of companies involved in electronic payments, used forecasts from the largest banks that projected at least 47% of U.S. merchant terminals would be enabled for chip technology in cards and smartphones by the end of 2015.

In the past year, U.S. banks have issued more of these secure smart cards, often called chip cards, to their card users in an attempt to meet an Oct. 1 deadline set by card processing companies, such as MasterCard, Visa and American Express, for payment terminals to accept smart card payments. Beyond that date, any merchant accepting a less secure method, including traditional magnetic stripe cards, will face financial liability in the event of fraud. Card users will not be liable.

Card processors use a standard called EMV, which stands for Europay, MasterCard and Visa, to provide interoperation of chip cards with point-of-sale terminals for authentication of credit and debit card transactions.

A smart card with EMV uses an integrated chip to bolster security by creating a one-time unique code for each purchase, called a token, to protect against counterfeit and lost and stolen card fraud. Fraud with magnetic credit cards is still growing in the U.S., and accounts for about half of the world's credit card fraud. The major breach of Target payment systems in December 2013 served as a wake-up call for many merchants and banks that accept the magnetic stripe cards.

To make a payment, shoppers usually "dip" a chip card into a payment terminal and complete a purchase by signing their names or entering a PIN. Phones like the iPhone 6, which supports Apple Pay, include an NFC chip that can communicate by a touch with many EMV-ready terminals.

There's no agreed-upon estimate of the number of payment terminals installed in the U.S. that support both chip cards and NFC-ready phones. However, terminal maker Verifone has said more than 70% of terminals it sells in the U.S. support both NFC phones and chip cards.

Whether many merchants will turn on the ability to accept NFC smartphone payments remains to be seen. A consortium of large retailers, including WalMart and Best Buy, called Merchant Customer Exchange (MCX) will unveil a competing payment system called CurrentC by mid-year that relies on QR codes to make payments. Many of those merchants will turn off NFC payment capability in their terminals, McKee said.

When the Oct. 1 liability shift deadline comes around, McKee said that terminals supporting EMV chip cards "will be far from ubiquitous." Some large retailers will be ready, he said, but not small and medium-sized stores. It will take until 2017 or beyond to see terminal penetration rates of 90%, he estimated.

The EMV-Connection Web site says there are 12 million point-of-sale terminals in the U.S. and 1.2 billion payment cards. As of December 2013, only 20 million chip cards had been issued to U.S. consumers, according to the site.

McKee said one reason that adoption of chip cards has not moved faster in the U.S. is that merchants expected the card processors to extend the Oct. 1 deadline. But then, in late 2013, the Target breach "started a frenzy of activity" toward chip card adoption, he said.

MasterCard's Barr, a native Australian, said chip cards are so prevalent in his country that one of every two transactions is done using a chip card. In all, 80 countries have migrated payment systems to the EMV standard. "The U.S. is not in the avant garde and is one of the last major geographies to convert," Barr said. However, he added, "We're seeing good retail brand pickup," including Chevron and Disney.

Both Barr and McKee said that MCX could blunt the use of smartphones with NFC for more secure payments, at least for a while, by setting up the CurrentC payment system.

McKee said MCX claims to represent more than 100 retailers in 110,000 locations with control over a third of U.S. consumer weekly spending. "It's unfortunate the way MCX is going about it, since the last thing you want is to create confusion for customers at the point of sale," McKee said. "Customers should have the option to use the payment system they want."

Copyright © 2015 IDG Communications, Inc.

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