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7 reasons to accept smart cards

By Daniel Workman

IBM researchers helped develop the magnetic stripe on the back of credit cards in the 1960s as a way to speed up back-office record keeping. Today, merchants throughout the U.S. continue to process transactions using magnetic stripe readers, principally because of comparatively low costs and entrenched habits.

us-credit-card-technology

However, a major downside to processing magnetic stripe credit cards is that tech-savvy criminals can easily capture and clone magnetic stripe data. The Nilson Report reveals that America now accounts for 47 percent of global credit and debit card fraud -- despite generating only 27 percent of total purchases.

The smart card solution
To combat the card fraud epidemic, European banks introduced chip-based smart cards based on standards that Europay, MasterCard and Visa (EMV) created in 1994. Smart card chips encrypt account information, which blocks skimmers from extracting directly usable data. European retailers adhere to a "chip-and-PIN" standard that requires smart card users to enter their personal identification number at checkout.

As a result, Europe has significantly reduced card fraud for over a decade, as have other jurisdictions that use smart cards, including Asia, Africa, Latin America, The Middle East and Canada.

Getting with the EMV program
According to the Smart Card Alliance, 1.2 billion smart cards have been issued worldwide, serviced by 18.7 million chip terminals as of March 2011. Now, that number is set to increase. This past August, Visa announced plans to accelerate the U.S. migration to chip-secured technology.

Now that Visa has put its weight behind EMV technology, it's a good time for American merchants to follow the card network's lead and adopt EMV-compliant processors.

Here are seven key reasons why American businesses should upgrade their point-of-sale (POS) processors to meet global EMV standards.

Reason No. 1: Tighten security protection against fraud losses.
The U.S. has become the destination of least resistance for global fraudsters that target old magnetic stripe processors. By upgrading to EMV-compliant terminals, U.S. merchants will eliminate many chargebacks from fraud-related losses. In the United Kingdom between 2005 and 2007, the introduction of "chip-and-PIN" smart cards reduced card fraud losses at U.K. retailers by 35 percent.

Reason No. 2: Shield against counterfeiting liabilities.
Effective October 1, 2015, Visa will shift financial responsibility for counterfeit transactions onto the systems processor of any business that does not use contact chip terminals. Merchants with EMV-enabled terminals will be exonerated from potentially devastating costs that their systems processor would otherwise pass on. Fuel-selling merchants have an extra two years to implement chip terminals before Visa's liability shift to the merchant side takes effect.

Reason No. 3: Qualify for annual compliance exemptions.
Effective October 2012, businesses that process at least 75 percent of their Visa transactions via EMV-compliant terminals during a given year will be exempted from validating their compliance with Visa's PCI Data Security Standard for that year. To qualify for Visa's audit pass, merchants must deploy EMV processors capable of accepting both contact and contactless payments.

Reason No. 4: Increase sales via contactless and mobile transactions.
Concurrent with its smart card initiative, Visa is also trying to persuade merchants to accommodate contactless and mobile payments. As systems expert Allen Weinberg recently commented, "Visa is fundamentally compelling all card-present merchants in the U.S. to upgrade their card acceptance infrastructure to also support contactless payments."

Weinberg also asserts that by offering multiple payment methods, merchants can increase sales. This makes sense, given that Visa's research shows that only about a quarter of Americans gravitate towards PIN-based transactions and instead prefer contactless "tap and go" or "wave to pay" payment options. Other analysts agree that mobile payments in the U.S. are set to take off.

Reason No. 5: Serve customers faster.
Visa-championed merchant systems upgrades not only enrich the customer experience via multiple payment methods, chip-based purchases are typically much faster than magnetic stripe transactions that require both online validation and customer signatures.

In Canada, where contactless and mobile technology is already in place, Visa Canada explains that, "When a customer uses a Visa payWave terminal, the card or mobile device and the terminal exchange security information and the transaction is completed, all in less than one-third of a second. The cardholder does not need to swipe a card or let it out of their possession, keeping the transaction quick and secure."

Reason No. 6: Achieve global interoperability.
U.S. merchants with EMV-compliant terminals can quickly process payments from international visitors, including affluent shoppers from Canada, Brazil and China. Americans who frequently travel can also use their smart cards to buy more safely from merchants with stores in other countries. Interoperability also permits convenient and secure purchases from e-commerce websites, no matter where the seller's customers are located.

Reason No. 7: Improve cardholder loyalty.
Smart card chips can store information from multiple loyalty programs and clubs, which also nurtures a superior buying experience. Because consumers can access many different loyalty rewards from one smart card or mobile device, spending at merchants with EMV-enabled processors becomes even more attractive.

See related: MasterCard urges ATM owners to upgrade to EMV; A guide to Visa's merchant incentives

Published: December 8, 2011

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