TODAY’S PAYMENT INDUSTRY LEADERS COULD BECOME TOMORROW’S LOSERS IF THEY FAIL TO COLLECTIVELY DRIVE EMV ADOPTION
Dr John Clarke, Head of Product Innovation and Co-founder of Worldnet, believes that the US payments industry must orchestrate a concerted drive towards EMV adoption or risk being disintermediated by new, web-based payments solutions as the industry moves towards a more flexible future.
At the World Economic Forum’s Davos meeting in January 2015, Bank of England Governor Mark Carney noted that the financial services industry was at greater risk than ever before of being disintermediated, or cut out of its own markets, by new players based largely on the internet. Since the turn of the millennium, many industries including restaurants, media, music and even the taxi business have been revolutionized by the internet: now the same revolution is happening in payments and financial services.
Outside payments, one can look to the retail Foreign Exchange (ForEx) business for an example of where banks have lost their historic, arguably comfortable, position. Over the past ten years, traditional banks have seen both their consumer ForEx volumes and margins eroded by new services such as CurrencyFair and ForExPro which offer consumers near money market exchange rates and fees that are less than a third of those traditionally charged by banks.
Within the payments space, the way in which consumers are choosing to pay is changing rapidly: in the year to February 2016, the value of contactless payments in the UK alone grew by more than 300% on an annualized basis, and the number of contactless payment cards grew by 36%. In the United States, mobile commerce – shopping over a WiFi-enabled digital device – has nearly doubled in dollar terms in the last two years, with sales rising from $14.8 billion in 2013 to $23.7 billion by the end of 2015 according to eMarketer, Inc.
Digital wallets, which store value on a card or mobile device, are similarly booming – a McKinsey report in late 2015 estimated that the value of transactions undertaken by consumers via digital wallets such as ApplePay, MasterPass and Visa Checkout would rocket from $2 billion in 2015 to $1.2 trillion by 2020, with more than $2.2 billion of this coming from peer-to- peer transactions that completely bypass the traditional payments environment.
However, all of these innovative payments solutions must gain and hold consumer trust if they are to succeed – and this is where the real benefit of the US card industry’s drive to EMV certification lies. Whilst alternative payment solutions have been growing rapidly, data breaches and fraud have also been increasing. 2015 saw a record US$8.5 billion in payment card fraud in the United States, and the US also experienced 76% of all consumer data breaches in the payments industry last year.
In this context, it’s no surprise that 90% of the senior executives we polled for “Squaring the Circle”, our new report into EMV adoption in the United States, believed that fraud losses are the major driver behind the US industry’s migration to the EMV standard. EMV offers better transaction security and better data trace-ability, both on-line and off-line, in real and physical environments.
It’s therefore correct to believe that EMV will help to stem fraud losses in the US, just as it did in Canada, where point-of- sale card fraud is down 88% since the introduction of the EMV standard in 2013. However, fraud reduction is only part of what should be motivating leaders in the payments business to drive through the migration to EMV. Current players in the payments business should also recognize that the very rapid growth in new methods of payments could see them being left behind unless they are able to offer flexible and secure payments at anytime, anywhere and over any kind of device. This is what we call the “omni-channel” approach to doing business, and we see this as the future for everyone involved in payments. It’s also an environment which is totally covered by the EMV protocol.
To date, however, progress in migrating the US payments infrastructure has been patchy. Although card issuance has moved at pace, with the ten major issuers constituting 70% of the card market issuing chip cards, acceptance has been slower to evolve. Currently only around one million of the 14 million acceptance locations in the US are EMV ready, a figure that is growing at around 4-5% a month, according to Ingenico. However, as 90% of the US merchant acceptance market is made up of smaller, family-run businesses, merchant adoption could take some time to complete – especially in the absence of a government mandate or clear communications approach to these merchants by the card industry.
Whilst 76% of senior executives we spoke to recognize that EMV will enable the development of mobile commerce by improving data and transaction security, 60% also believe there needs to be a better business case made for EMV migration, with 80% of respondents citing high costs and 75% citing process complexity as reasons why the migration to EMV has been sluggish to date in the United States.
We believe that it’s time for the US card business to respond to these concerns by delivering scalable EMV implementation packages that cover both physical and virtual world transactions; packages that are both cost-effective and time-efficient to implement. By providing merchants with the capacity to accept internet and physical transactions, digital wallets and mobile devices, players in the card industry will speed up the adoption of EMV across the US payments business.
Failure to act quickly will lead to increases in fraud and data breaches as criminal activity migrates from EMV compliant markets elsewhere in the world to the US and consumer confidence in the existing payments infrastructure could decline. More damagingly, today’s payment industry leaders could become tomorrow’s losers if they fail to provide the enhanced transaction and data security offered by EMV to all points of the emerging “omni-channel” environment.
To download a copy of “Squaring the Circle: Driving EMV Migration in the USA”, please click here.