Incompatibility in card technology? Not really.

I decided to write this after seeing a summary of Aite Group’s report concerning U.S. cardholders and their experience abroad.

It states that “The promise of ubiquitous card payments acceptance falls apart once U.S. cardholders cross their national border” and “an issue caused by incompatible card technology is treated far more seriously by cardholders than issues stemming from card acceptance, fees or merchant policies.”

Really? Is this brought about by the incompatibility in the card technology?

I do have an electron VISA card issued here in Europe which is a chip and pin card. I can’t use this card everywhere here in Europe. I can’t use it to pump gas. I can’t use it to pay for parking. I can’t use it to pay for tolls. I can’t use it in most unattended terminals that accept chip. I also can’t use it to pay for food that I buy in an attended café/bar in a TGV train. This experience debunked my initial theory that perhaps it was just unusable with most unattended terminals.

The summary of this Aite Group report stated : “With European markets moving to smart card-based payments, US travellers are finding their mag-stripe cards being rejected at retailer Chip and PIN terminals and foreign cash machines. European issuers meanwhile are growing concerned at the higher incidence of counterfeit card fraud occurring on US shores, leading to calls for the US banking industry to switch to the chip-based EMV payment card standard.”

This report concludes that this issue is as a result of incompatibility in card technology. Being that I’m a bit more informed than your regular cardholder, I would like to propose for consideration, the real reason why some US cards and certain chip and pin cards issued in Europe are rejected at retailer chip and pin terminals and cash machines. Based on my very own experience and knowledge, all the rejected transactions that I made with my electron VISA chip and pin card required on-line authorizations. An on-line authorization is necessary to obtain an approval by the Issuing Bank. In addition to checking the validity of the pin-code, the Issuing Bank also checks if the bank account balance or the open-to-buy limit will cover the transaction amount.

I would bet that business is as usual if a US issued card or a European issued electron VISA chip and pin card is used with a merchant terminal that initiates an online authorization.

I’m not saying that all US issued cards require online authorization. There are some that are designed in a way that will not require the terminal to do an online authorization for a small amount such as an AMEX card or a VISA / MC gold or platinum card used with a standalone toll terminal for 2 euros. And indeed, a U.S. VISA gold magnetic-stripe card was more useful in paying for toll in France than my French issued electron VISA chip and pin.

U.S. cardholders that rely on using their cards to pay for their travel expenses in Europe will find a way to transact with terminals and/or merchants that will accept their cards. Even if it means finding an ATM to withdraw the cash (all ATM transactions require online authorizations) or going to a money exchange store to obtain cash using their debit cards, U.S. cardholders will find a way to use their cards and pay for their travel in Europe. Therefore, I highly doubt that the US card industry missed out on $3.9 billion in transactions and $447 million in revenues as a result of the failures (as Aite Group report stated). A more likely outcome is that U.S. cardholders will find themselves doing ATM withdrawals so they can pay small amount transactions in cash.

To put it generously, I find that Aite Group report’s statement that “US travellers are finding their mag-stripe cards being rejected because of the incompatibility in card technology” is lacking in accuracy.

Concerning “European issuers meanwhile are growing concerned at the higher incidence of counterfeit card fraud occurring on US shores, leading to calls for the US banking industry to switch to the chip-based EMV payment card standard”, as I have explained in several comments and blogs, EMV is a very cost-intensive solution which impacts not only card issuers but merchants and payment processors. I think most people in the industry know that there is no business case in the U.S. to drive the move to EMV.

Signature-based U.S. magnetic-stripe cards are also not good targets for card skimmers. White Plastic fraud works mostly if the pin-code is captured. What is also a myth is that U.S. has a higher card fraud rate. “David Robertson, publisher of The Nilson Report, a trade newsletter that tracks the payment industry, estimates that $1.24 billion was lost to fraud in 2007 in the United States, up from $1.14 billion in 2006. But in both years, that works out to just 5.7 cents for every $100 that customers charged on their credit cards.” Card Fraud in the U.S. = 0.057% of transactions, by value. According to APACS, for UK in 2008 : “fraudulent transactions make up 0.12% of all transactions, by value”. 

In addition to this card fraud debate, it is also useful to point out that mandating EMV in Europe resulted to a decrease in interchange fee revenues for European card issuers. At least in France, banks compensated this decrease in interchange fee revenues by charging annual fees to their cardholders. It would be extremely difficult to sell cards with annual fees to american consumers. Considering the latest banking crisis, EMV is a very difficult sell to US banks.

Commercial habits are also quite different in the U.S. U.S. economy is highly dependent on consumer spending. Supermarkets are open 24/7. Fast Food shops and some restaurants are also open 24/7. Parking garages are open 24/7 and are attended by people. Gasoline stations are also open 24/7 and are also attended by employees. There are not a lot of stand-alone terminals and perhaps it will stay this way for sometime in the U.S.

There are other efficient solutions that European issuers can implement to deflect the increase in skimming of their issued cards, that is, if they truly want to protect their cardholders. Requiring the U.S. to implement EMV is not the only solution.