Merchants need to prepare for big changes as more consumers move away from magnetic stripe credit cards.
That's according to Owen Britton Jennings, head of business intelligence at Square, who this week led the webinar "The Decline of Magstripe Cards--and What That Means for Your Business" at National Small Business Week in Washington, D.C.
Jennings spoke about the recent changes to payment technology, the "sunset" of magstripe cards, and the implications of those changes for small business owners. Here is a summary of his thoughts on the industry and tips for taking the changes in step.
Cash is not king
Cash use in the United States continues to decline, representing only about 25% of all consumer spending due to the rapid increase of e-commerce and the switch to debit cards and credit cards. Card volume in the U.S. is expected to have doubled in the decade leading up to 2017.
Within card payments, consumers are moving away from magstripe cards as a result of more secure methods such as contactless and chip-integrated cards (dubbed EMV cards after the three companies--Europay, MasterCard, and Visa--that first instituted the tech standard). The data in a magnetic stripe is easily replicated due to its static nature, whereas an EMV card chip acts as a small "mini-computer" storing payment data in a constantly changing form, making it much harder to clone or counterfeit.
Until recently, the cost for the U.S. to upgrade to chip-card payments outweighed the costs of fraud. But as other countries adopted more secure technologies, fraudsters migrated to "the path of least resistance" in the U.S. where easily cloned swipe cards are still widespread. So despite accounting for only 25% of global card volume, 50% of all card-present fraud is in the U.S.--which is driving the country's current shift towards more secure payment methods.
Of the millions of credit card transactions handled by two million Square sellers, the number of EMV cards used rose from 12% in January 2015 to more than 50% in December, and it has continued to increase year to date. "Full migration" to chip cards occurs both on the consumer side with card registration and usage, and on the business side in terms of upgrading terminal hardware. For other countries, fully implementing these card technology changes has taken about 3 to 5 years.
Liability shifts to businesses
As of October, the financial liability for transaction fraud shifted from the banks to the sellers--but only in cases where a face-to-face purchase occurred and the buyer swiped an EMV card because a chip terminal was not made available. In other words, the incentive structure has changed, pushing for sellers to upgrade their terminals to accept chip cards to avoid the fraud liability.
Square data shows that between 40% to 50% of all terminals in the U.S. have been upgraded to accept new payment technology but not all have been enabled.
Digital trumps plastic
Although chip cards are more secure, they also present additional costs in terms of longer transaction times (double or triple the time to checkout). The real-time authentication process that takes place at the point of purchase, in addition to the customer learning curve for the new technology, adds time to EMV transactions. This additional cost, according to Square's Jennings, is pushing consumers to contactless payments.
The future of payments
Contactless payments in the form of Apple Pay, Android Pay, or tap cards are also known as near field communication or NFC payments. This technology uses radio frequency identification, or RFID, to allow two devices in close proximity to communicate with each other through radio waves. These digital payments are also secure, in some cases more secure than EMVs, because the data is encrypted and changes from transaction to transaction (so it's not static). In addition, there are other layers like fingerprint validation or passcodes. Customers are increasingly asking the question: Is tap OK? "More and more people want to pay with contactless and checkout faster," Jennings said. "I think NFC is the future."
In choosing whether or not to upgrade terminals to accept the EMV and NFC technology, Jennings urged businesses to consider what would result in the best customer experience as you grow and scale operations.