EMV Implementation and In-Store Liability: What Retailers Should Know

The payments industry is evolving rapidly, between the switch to Europay, MasterCard and Visa (EMV) in the United States this past year along with the successes and failures associated with mobile payments. With new innovations and technologies also comes a shift in consumer behavior and expectations.

Merchant transition to EMV has been slow, with only 37 percent of retailers indicating they were EMV compliant, according to a survey conducted by The Strawhecker Group. Consumers now expect and trust secure point-of-sale (POS) systems. Therefore, it's critical for retailers to adopt new solutions and technologies such as EMV so that they can deliver the experience their customers have come to expect and demand.

As of Oct. 1, 2015, the rollout of EMV chip technology began in the United States. EMV technology helps to reduce counterfeit fraud as it generates data with each payment to authenticate the card, and then the cardholder is prompted to sign or enter a PIN to confirm their identity. While the U.S. retail payments system has been relatively stable for decades due to no major changes in POS systems, changes across the world have encouraged the U.S. to undergo some overhauls when it comes to POS systems.

As a merchant, it's important to pay attention to these shifts and read materials about the changes. You know that EMV is here, but what issues does it create? How costly can the choice to not upgrade a POS system be? When will retailers be held liable for in-store purchases?

Prior to EMV, the merchant wasn't held liable for in-store purchases. For instance, if retailers swiped a customer’s credit card, checked the back for a signature, and verified that signature and identification matched the driver’s license, if any fraud was committed it fell on the issuer and not the merchant. With EMV, it's the merchant’s choice whether it wants to upgrade its technology in-store to support chip-based cards. However, failure to do so now places the fraud burden on the merchant.

While EMV brings a learning curve, the benefits to upgrading the hardware for card-present transactions are many. For instance, it's been proven that EMV can help eliminate counterfeit fraud, which accounts for two-thirds of in-store fraud. Additionally, a recent Nilson Report found that the U.S. was home to nearly half of the world’s credit card fraud in 2014, accounting for 48.2 percent of global card fraud losses. Internationally, countries such as the United Kingdom have seen as high as a 70 percent drop in card-present counterfeit fraud since chip adoption.

If retailers choose to not upgrade their hardware and technology, the rules will likely work against them. For instance, EMV technology will continue to change the rules of where liability for fraud and chargebacks falls. As previously mentioned, one of the most drastic shifts that comes with the changes in technology is the shift in liability for any fraudulent charges. Here are a few key details retailers should be aware of around EMV chips and in-store liability:

1. If the merchant hardware doesn't support EMV and the customer swipes a chip-based card and it's claimed as fraud, the merchant will be held liable.
2. If the merchant hardware does support EMV, but the card used isn't a chip card, then the liability falls on the issuer if the charge is flagged as counterfeit or fraud.
3. If the merchant hardware does support EMV and the customer inserts a chip-based card, then that liability also falls on the issuing bank of the credit card.

Based on these rules, it's in the merchant’s best interest to upgrade its POS hardware and technology to support chip-based technology. However, with the shift to EMV comes unexpected costs for retailers. On average, companies are charging $200 to $500 per EMV terminal to upgrade. While the initial costs may seem high, the consequences of not upgrading can be far more costly.

For example, if a fraudster comes into your store and purchases $500 worth of clothing with an EMV-enabled card, but your terminal only accepts magnetic strips and the customer is able to swipe the card, this transaction could come back as fraud and you would be held liable for that entire transaction. Per the new rules, the choice to not upgrade POS terminals could lead to expensive lessons learned the hard way by retailers.

Another reason to upgrade is if fraudsters realize your store doesn't have an EMV POS system, they may end up targeting your store since they know they can still use their proven methods without trouble. Fraudsters who specialize in credit card fraud want the easiest methods possible. Without EMV chip cards issued or without an EMV-based POS system, your company will be a richer target for criminals.

While there's no immediate requirement to upgrade POS terminals to support EMV, it's vital that retailers be aware of the new rules. While upgrading POS in each retail store may seem expensive, the associated charges with new in-store liability rules create an even larger expense.

Michael Estabrooks is a financial recovery and reporting analyst at Radial, a provider of commerce technologies, omnichannel operations and marketing solutions.