| The good news: The global smart card market could generate as much as $3.3 million in revenues for the financial industry by 2006, according to Frost & Sullivan. The bad news: participation and the implications of the EMV mandates mean that we are all going to have to pay to play. The not-so-bad news: adopting the right strategy at the right time can justify the costs and reap the benefits of EMV.
EMV, the internationally accepted standard for debit, credit and charge cards with chip functionality, was originally created by Europay, MasterCard and Visa, and is now administered and updated by an independent body, EMVCo (www.emvco.com). The primary reason behind EMV-based smart card adoption is the need to control fraud. The vulnerability of the magnetic stripe -- to counterfeiting or 'skimming' (the copying of valid information on the stripe of one card and transferring it to another card, or multiple cards) has resulted in a serious compromise of the integrity of existing card-based payment mechanisms.
Payment integrity and security through smart card-based authentication are driving the EMV mandates and are a critical reason for migrating to a more secure acceptance infrastructure. All of the major card networks, Visa, MasterCard and American Express accept the standard and are implementing it. The other card networks, Diners, JCB and local networks are also committed to implementing the standard over the next few years. The mandates are driven in some cases by local incentives to comply and in all cases by a liability shift for non-compliant fraudulent transactions, meaning that EMV will become universal by 2010.
According to Frost & Sullivan, the EMEA (Europe Middle East & Africa) market is at the forefront of smart card readers/terminal deployment. In 2006, the EMEA region is expected to account for 46.6% of the total market, followed by North America (32.5%) and Asia Pacific (20.9%).
EMEA has suffered restraint through high smart card unit costs and, to a lesser extent, performance. The price constraint has been largely eased by the Visa $1.99 card, as opposed to a previous $5+ in many instances. However, beyond the card unit cost, encoding, embossing, personalization and secure distribution are also presenting harsh economic choices to issuers. Frost & Sullivan also added that enormous outlays are required to upgrade terminals to smart card-ready ones, placing a burden on transaction acquirers, and creating a significant restraint on growth.
As smart cards reach a more global scale, the hardware costs will decrease, and the demand for secure network applications will rise. In addition, as the migration takes place, fraud will naturally move to those banks that are still operating magnetic stripe cards only.
To offset the potentially large costs of implementing EMV, banks should envisage a phased development:
- Comply with local card network requirements at each phase of the development
- Upgrade when the requirements call for additional or restricted functions, such as when a local subset of EMV is mandated
- Upgrade when the volumes and economics of your main markets warrant it. For example, don't upgrade dispute resolution to EMV levels when there are no EMV transactions in your main markets
- Maximize cost savings by balancing phased development with the card networks, the market and your individual portfolio performance and profitability requirements
EMV smart cards have become a reality. Therefore to make money on EMV requires:
- Control by each issuer and acquirer of its own systems and associated costs
- Planning in a phased and detailed manner and accepting that the initial stage is infrastructure building
- Controlling costs and protecting profitability at each stage of development and adoption
Once completion is in reach, banks can add value to their portfolios by offering next-generation, personalized and customized customer service. Widespread card fraud will finally come under control and be reduced to all-time lows. |
