The Great August EMV Pile On

There was a lot of piling on last week over EMV and the degradation of the consumer experience at the point of sale in the U.S.

The Wall Street Journal started that ball rolling with a piece detailing the author’s disdain for the chip card experience, advocating that “mobile payments like Apple Pay are the real answer” and that consumers should petition their favorite merchants to get on the mobile payments bandwagon ASAP. You could hear the cheers from Cupertino all the way to Boston.

Then, there was The New York Times piece on Friday poking fun at the inconsistent experience that consumers now face – sometimes swiping, sometimes dipping and waiting, sometimes – at merchants with an optimized EMV experience – being able to more or less dip and run, and at restaurants still sticking their card in the check register. Their takeaway, too, was that it’s time to move to mobile given the dazed and confused consumers that are wandering in and out of merchant storefronts these days.

Other media, having seen these two pieces, are now piling on too – all with their own sharp barbs about the bad experience that merchants are now “forced” to present to their customers, thanks to the EMV standard.

And, you know what?

The allegations of inconsistency at the point of sale and consumer confusion are, sadly, true. It will be that way for a while as all 8 million or 9 million merchants in one of the biggest card markets in the world transition to this new card standard. And, yes, all of us here in the U.S. hate to see our easy-breezy uncomplicated swipe evaporate, something that is now an increasingly nostalgic experience.

But let’s throw a little perspective on the topic.

I’m about the last person you’d expect to come out in support of EMV here in the U.S. In fact, over the last few years, I’ve been highly critical of merchants being asked to move heaven and earth to adopt a 30-year-old standard designed to solve a problem that didn’t exist in the U.S. I advocated repeatedly for the ecosystem, instead, to consider putting their collective resources together and leapfrog to mobile using modern technologies to reinvent the shopping experience with a device that could also deliver a highly secure checkout experience. I thought that investing the billions of dollars and the time it would take to make a move to chip from swipe was a distraction for merchants, especially since we could take other steps to protect and encrypt data at the point of sale – and time and money would be better spent investing in the innovation that would make the merchant and consumer experience a whole lot more valuable.

It was a perspective that might have even been gaining a little momentum – until Dec. 19, 2013.

That’s when the Target breach was disclosed, something I described in late January 2014 as one of payments’ Black Swans. On the heels of the Target breach, there was Home Depot, and then Neiman Marcus and many more large merchants after that.

All enough to derail the I’d-rather-fight-than-switch-to-EMV train. And as a result of what happened at a few large merchants, the EMV train that is the subject of such great criticism today left the station, with its impact now rumbling throughout the merchant ecosystem.

The networks used the big retailer POS breaches to remind all merchants of the October 2015 liability shift date – a date they had alerted merchants to several years earlier. And big merchants, whose boards were looking for something immediate and tangible to reassure the consumer that it was safe to shop with them, embraced EMV fully. And used it for cover when they were dragged before Congressional committees to explain what had happened and what they were going to do to keep it from happening ever again. The full-on embrace of EMV was also despite everyone’s admission that EMV would have done nothing to prevent the breaches that these large merchants had suffered.

So were the next two years a nightmarish journey filled with compressed timelines and testing and certification pileups and concerns over the liability shift deadline coming too close to the all-important holiday season and its impact on  checkout times and lines?

Yup.

And complaints of skyrocketing chargebacks post-October 2015 as crooks exploited the cracks in the merchant deployment rollout and savvy customers gave the notion of friendly fraud a new lease on life?

Yup.

And, just recently, was it confirmed that the really big thing that would protect cardholders and merchants from fraud at the POS is end-to-end encryption – after NCR researchers found a way to spoof the magstripes on chip cards?

Yup.

Regardless, the EMV in the U.S. train is chugging along and making progress month over month. Thirty percent of all merchants are now EMV-enabled and hundreds of millions of cards have chips. The U.S. has made a ton of progress in the last nine months to move as quickly as possible to an EMV standard. Even my teeny-weeny Beacon Hill Starbucks has two shiny new Verifone EMV terminals on the countertops, right next to the gift card display and biscotti. That says a lot. The merchant that’s also the poster child for the most successful use case for in-store mobile payments has embraced EMV.

And while consumers may complain about a confusing experience at checkout (and they have every right to), they haven’t stopped using their plastic cards.

Why would they?

Consumers use those cards because – aside from cash – they’re the most ubiquitous form of payment in the market today. Until another method of payment achieves that level of ubiquity, they’re what consumers will carry everywhere and use.  The trade-off that consumers will gladly make is adjusting to the “new normal” at checkout in exchange for being able to use that ubiquitous piece of plastic everywhere they shop.

That means that we all need to get a grip and work hard on two, parallel priorities.

First, merchants and networks must work together to optimize EMV at the POS since cards aren’t going anywhere anytime soon. Some large merchants are doing that already. I’ve noticed that Walgreens at the POS using my chip card is now pretty speedy – my card gets dipped and I can remove it almost right away. And both Mastercard and Visa have published their own fast/quick chip protocols that can make EMV faster, too. Both networks say that many merchants are skipping right to the expedited implementation in an effort to make the experience more akin to a swipe transaction.

And the second priority is to simultaneously figure out a way to unleash the power of mobile at the point of sale.

In a perfect world, this would include an open and healthy dialogue between the two very important stakeholders that make the payments world go ’round: the merchants and the networks. Maybe it would even involve some money exchanging hands with the networks giving merchants some incentives to move quickly for the greater good.

Unfortunately, we don’t live in a perfect world.

Merchants have been at war with the networks for decades over the cost of accepting those plastic cards. More precisely, it’s the Treasury guys and gals at large merchants that really have the beef. They’re the ones who see interchange as a cost item on their balance sheet and they don’t like the number. Those concerns have escalated into a public battle using two potent weapons — namely class-action lawsuits in the U.S. and legislation (Durbin in the U.S. and MIFD in the E.U.) – in an effort to lower those fees. Their issues now with EMV haven’t done much to smooth the already rough edges in that relationship. If anything, it’s lead to even more lawsuits.

But here’s another place where perhaps a little perspective might be helpful.

Truth be told, interchange for the vast majority of the volume that merchants see – debit – is already pretty low.

Back in October 2011, the Durbin Amendment reduced debit interchange to roughly 24 cents (all in), which the corporate treasurers viewed as a huge loss. They were lobbying for something more like 6 cents and thought they had the Fed convinced to make it 12 cents. If merchants had their way, it would as close to zero as possible.

The whole issue is rearing its ugly head again today since part of the rationale for the 12 cent to 24 cent bump was to account for fraud. Merchants say that EMV now eliminates that cost so the fee needs to be lower. Depending on what happens in November, this could bubble back up again at the Congressional level, especially now that both the elephants and the donkeys have decided they don’t like bankers.

On top of that, there’s the interchange settlement that the networks thought they’d negotiated with merchants that would finally put all of the interchange strife behind them. In June, 2nd Circuit Court of Appeals threw that out – the result of which is that the networks and merchants are, once again, in active ligation. Probably for at least another decade.

There are several ironies at play here.

Merchants say that lowering interchange will save consumers money. But the reality is that it doesn’t do enough for anyone to notice it or measure it. On the flip side, the banks that have to support the depository accounts that are attached to these debit cards no longer have much in the way of fee income to work with to service and secure those accounts.  Debit rewards are a thing of the past and banks are forced to pass those higher bank servicing fees to the consumers. Banks, aren’t regulated public utilities – yet – so need to deliver a return on their investments to shareholders.

It’s also not as though all merchants would benefit much from the collective action to reduce interchange. If the rate is the same for all merchants, there’s no cost advantage over other merchants that would help them get more customers. And the largest merchants negotiate their own rates based on volume – so they already pay low rates. The result then of any collective action to lower fees is to further advantage the largest merchants who then use the lower threshold as a starting point to negotiate their already low fees lower. The real winners then are the lawyers, who are the benefactors of tens, if not hundreds of millions of dollars, of legal fees.

In an effort to control their own interchange destiny, merchants tried to create their own low-interchange mobile payments network. It fizzled. MCX and CurrentC flamed out after 5 years (3+ of which was spent building a pilot) since consumers didn’t really care that the mobile payments scheme was cheaper for merchants. Consumers cared that they couldn’t use it at enough of the places they wanted to shop. So they didn’t.

Shopping and buying is, of course, what the guys and gals on the marketing and mobile and eCommerce side of the merchants care about a lot.

They have their eyes on another line of the balance sheet: the revenue line. And all they want to do is to sell stuff – and as much of it as they can. They also know that selling stuff means accepting the method of payment that enough consumers have and want to use. And now, and for years to come, that will be a plastic card (or a digital account credential) with a network brand on the front, issued by a bank. That means EMV cards. Remember my little story last week about debit ignition? Debit ignited because 220 million+ people were walking around with ATM cards and merchants were given an incentive to accept them. No different this time, with the incentive being protection from chargebacks.

So, conversations at executive levels about how to capture the real POS opportunity – mobile – and move it along, now happens with the overhang of billions of dollars of pending litigation that has raged for decades. And likely an army of lawyers sitting in on meetings and reviewing every last email before it’s sent. Not exactly an environment conducive to merchant/network collaboration or free and open dialogue about how to use new technologies to transform the shopping experience and drive sales for the benefit of the consumer.

And it’s a shame that it’s not.

Even before the great EMV pile on, there isn’t anyone across the payments ecosystem that doesn’t believe that mobile/connected devices and apps and the cloud will become the focal point of the merchant/consumer relationship in the future. All of us, too, see the opportunities at the intersection of the on and offline channels as those lines blur and omnicommerce becomes less aspirational and more de rigueur for merchants. The stats on the growing significance of mobile to the consumer’s shopping and buying experience and the steady uptick in sales in that shopping channel are just one proof point.

The impact of mobile order ahead is another, as average order values for those transactions increase by as much as 25 percent and drive an increasingly larger percent of overall transactions at those merchants.

The impact of buy online and pick up in store is as impressive as average transaction values increase as much as 30 percent for those who take advantage of that option. More importantly, this option gets consumers back into the physical storefronts which have seen nothing but declining foot traffic over the last several years.

That makes – or should make – the topic of conversation how to make shopping more accessible to consumers and actionable when they are most motivated to buy. Today, we have the technologies and tools to capitalize on that in a way that enriches the relationship between merchant and consumer – and the top line of the merchant.

So, now’s the time to get serious about removing the friction that may now be throwing sand in the wheels of that progress.

Friction like force-fitting mobile payments into a technology solution that doesn’t make the opportunity inclusive to anyone with a mobile phone, the potential to download an app and an interest in shopping.

And friction over what it means, exactly, to create a “merchant-friendly” solution. Most of the time that’s code for reducing fees. Yet, we’ve seen how little that value proposition matters to the consumer – and how little impact it has on sales.

Seems like the most merchant-friendly proposition of all is innovating in ways to drive the top line since that’s where the rubber meets the road for everyone – since selling more stuff and creating a loyal consumer trumps all.

The merchants and networks should stop fighting last century’s interchange fee wars, sack all the lawyers and get them out of the way, and work together to win this century’s war: having mobile move plastic and cash digital.