EMV and interchange: what you need to know
When the fraud chargeback liability shift of October 2015 ushered in the rise of EMV, the United States began seeing a drop in in-store fraud, much like other EMV-adopting countries that had previously implemented the chip card technology. Universally accepted by both financial institutions and merchants as an effective security solution, EMV has helped businesses fight fraud from the front lines of payment transactions. However, along with the benefits of greater security, some merchants have experienced a dramatic increase in their debit transaction fees since last year’s EMV deadline.
The increase stems from new terminals’ preference for Visa and MasterCard debit payment networks. Providing a chip-based card at the time of payment, a customer may be obligated to use Visa’s network, for example, or they may be given the option to select the “U.S. debit” substitute. Given the choice, customers often elect the more familiar Visa option, which requires a signature. The signature option is also accompanied by a 1 to 2 percent network fee per transaction – typically a more expensive fee compared to its PIN-based alternative.
But should a more secure transaction come at a greater cost?
Making payments safer and more secure, EMV upgrades have affected card present fraud significantly. According to MasterCard, fraud data taken between April 2015 and April 2016 shows a 54 percent decrease in counterfeit fraud costs. As one piece of the interchange fee formula, the drop in in-store fraud rates is prompting brick-and-mortar merchants to argue that less risk warrants discounted transaction fees.
The opposition to fees has instituted some changes over the past several years. In 2010, the Durbin amendment to the Dodd-Frank financial reform legislation allowed U.S. debit card interchange rates to be capped at 22 cents plus 0.05 percent of the transaction. The amendment, however, applies only to debit, leaving interchange fee revenue on credit card transactions unregulated and highly profitable. Currently, the U.S. has made no move to impose caps on credit transactions, an action already taken by Canada, EU, and Australia.
More recently, the Merchant Payments Coalition (MPC) petitioned Visa in 2015 to lower interchange fees in expectation of the drop in card present fraud as a result of merchant EMV adoption. After a hearing held by the U.S. House of Representatives Small Business Committee, Visa ultimately refused to lower rates, citing its ongoing investments in security and technologies that make payments more convenient and help to promote “consumers’ confidence in using electronic payments.”
Short term, interchange fees are unlikely to be lowered in the upcoming years. However, as card present fraud continues to drop, merchant groups could have more leverage to challenge the current interchange fee rates. In preparation for potential changes, which may result in lost revenue, financial institutions have the opportunity to invest in their merchant relationships by
- Re-evaluating networking routing options and true costs
- Offering the optimum cost-effective options to merchant customers
- Exploring revenue opportunities within card portfolios through analytics and data insights
- Leveraging the latest fraud mitigation solutions to keep fraud loss related costs at a minimum while improving cardholder confidence
Implementing proactive solutions can not only improve you institution’s bottom line at the present, but strengthen your groundwork for the future. To learn more about and to help determine what solutions might work best for you institution, contact your trusted payments processor.