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posted on 15 February 2016

Waiting For The Other EMV Shoe To Drop

from the Atlanta Fed

-- this post authored by David Lott

The EMV, or chip card, liability shift for point-of-service (POS) transactions began on October 1, 2015. The sun continued to rise and set each day thereafter, despite the predictions of a few that EMV conversions would bring retailer POS checkout processes to a grinding halt and create major consumer dissatisfaction.

Sure, there have been some issues around longer card transaction processing time and, some retailers chose to defer their EMV implementation until after the holiday buying season. But, all in all, the terminal and card conversions have moved steadily forward.

In the United States, there are an estimated 410,000 to 425.000 ATMs operating with 55 - 60 percent of them owned by independent (non-financial-institution) deployers. The impact of the next EMV liability shift on October 1, 2016, might be more significant, especially for these independent ATM operators. On that date, an ATM that accepts any MasterCard-branded card must be EMV operational or the ATM owner will face liability for any fraudulent transaction performed with a counterfeit MasterCard. Under current network rules, the card issuer currently assumes 100 percent of fraud losses from ATM withdrawals made with a counterfeit card. While Visa's timetable for ATMs to be EMV operational is not until a year later, since virtually all ATMs in the United States accept both Visa- and MasterCard-branded cards, the earlier timeline for MasterCard essentially forces all ATM deployers to be ready. While the liability shift is not a mandate, it is expected that most ATM deployers will make their ATMs EMV operational to avoid being saddled with the additional liability.

For the independent ATM owner, their decision to upgrade, maintain, or remove a particular terminal is a challenging one. Their terminals are generally the more simplified table-top cash dispensers rather than the fully function ATMs installed by financial institutions. They are often installed in convenience stores, restaurants, bars, and other specialty retail locations. While their purchase cost is substantially less than full-service, heavily armored ATMs, their average transaction volume is also substantially less due to their location and the foreign transaction fees imposed by most cardholders' financial institutions. Their revenue comes primarily from an ATM surcharge fee and a dwindling network interchange, out of which they have to pay all their operating expenses, including rent to the retailer where the ATM is located. An ATM generating $100 a month in net profit is considered a successful ATM. The cost to upgrade such a terminal is highly variable depending on its current hardware and processing capability, but just the cost of an EMV card reader, its installation, and testing is generally in the $500 to $800 range. The older cash dispensers may not be suitable for upgrades.

This industry has seen its cyclical periods of prosperity and austerity over the last 15 years, with its financial challenges generally centered on the hardware and software upgrades related to regulatory compliance - first with Y2K compliance, then with the American with Disabilities Act (ADA), Triple DES, PCI, Windows XP nonsupport, and now EMV. As occurred with these earlier technology upgrades, the industry is seeing further consolidation of ATM terminal portfolios. A number of industry observers share my prediction of a contraction in the ATM installed base by as much as 15 percent by the end of 2016 due to further bank consolidations and the cost impact of the EMV upgrade. Since cash operations is a major function of the Federal Reserve System, we will be watching this impact with considerable interest.


About the Author

Photo of David LottDavid Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

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