When you consider how much technology has changed over the past half-century, it’s kind of surprising that credit and debit cards are still processed in the United States pretty much the same way they were when paying with plastic first became widespread back in the 1980s: with magnetic stripe cards.

But this technology is currently undergoing a radical transformation as the U.S. payment industry shifts to EMV (aka, chip cards or smart chip technology) over the next year. EMV stands for Europay, MasterCard® and Visa®, and is a new type of card processing technology for the U.S. that is replacing old magnetic stripe cards with microchip-embedded cards. These new cards will help reduce payment fraud and make credit and debit card transactions more secure.

History of EMV

EMV was first introduced in Europe more than 20 years ago, and most developed countries around the world have already migrated to chip-embedded cards. The United States is the last major world economy to make the switch to EMV. MasterCard and Visa have introducedroadmaps for EMV migration that culminate in a shift of liability for fraudulent card transactions from banks to merchants starting October 2015 if the merchant is not equipped to process EMV chip-embedded cards at that time.

The migration to EMV in the U.S. has been planned for some time now, but the high-profile thefts of credit card data at major retailers such as Neiman Marcus, Home Depot, and Albertsons over the past year heighten the need to make the switch. Target has already announced that it will embed all of its store-branded REDcards® with EMV chips and start accepting all EMV chip-embedded cards by early next year.

EMV significantly reduces credit and debit card fraud by substituting a computer chip for the mag stripe on cards. Instead of swiping their cards at the point of sale, customers will insert them into a card reader that will read the microchip. Once the card is inserted into the terminal, a message will display asking the cardholder for either their PIN or signature.

Our neighbor to the north offers a glimpse at how EMV could help reduce credit card fraud here in the U.S. After Canada completed migration to EMV in 2009, annual losses due to credit card fraud dropped from $142 million to $38.5 million in just three years. Other countries have experienced similar reductions in credit card fraud after migrating to EMV, according to the Payment Card Industry (PCI) Security Standards Council.

A Herculean Task

As you can imagine, converting the entire U.S. credit and debit card industry to EMV is a herculean task. Of the approximately 511 million credit cards that are now in circulation in the U.S., only about 8 million are EMV chip-embedded. And of the approximately 11 million point-of-sale (POS) terminals in the U.S., only about 2 million are EMV-capable.

In fact, a recently issued report from Javelin Strategy & Research estimates that it could take until 2018 for EMV chip-embedded cards to become commonplace in the U.S. The report predicts (not surprisingly) that big-box retailers will lead the way in installing EMV-capable terminals, but that small and micro-businesses will lag behind. It estimates that EMV readiness among retail establishments with fewer than 20 employees will not exceed 25 percent by next October.

A lack of awareness of the migration to EMV in the U.S. and what it means to them is the main reason for this high level of anticipated unpreparedness among small merchants, according to the Javelin report. More than half (53 percent) of the small merchants who responded to the survey said they had no knowledge, or very limited knowledge, of EMV. In addition, 50 percent said they had little or no knowledge that the liability for counterfeit card fraud will shift next October to merchants not equipped to read chip cards.

Consumers are even less knowledgeable about EMV. In a survey conducted by Phoenix Marketing International, nearly 90 percent of consumers said they know very little if anything about EMV.

What You Should Do Now

If your business accepts credit and debit cards for payment at the point of sale, then you should make upgrading your POS equipment and infrastructure a top priority between now and next October. At that time, if a customer presents a chip-embedded card to you for payment but you have not yet installed an EMV enabled POS terminal, your business — not the bank — will assume liability for any credit card fraud loss that occurs with the transaction.

Upgrading your POS equipment is not just a defensive measure to guard against assuming liability. It will also enable you to take advantage of new payment options made possible by dual-interface EMV-capable terminals, including contact and contactless transactions (i.e., tapping or waving the card instead of inserting it into the terminal).

It’s not too early to start planning for acquiring new EMV enabled terminals for your business. To learn more about these and other treasury management tools offered by City National Bank, give us a call at (800) 599-0020. Or Contact us to request that a Relationship Manager contact you about how EMV will affect your business and how City National can help you prepare for the October 2015 deadline. For a limited time only, save up to $2251 for each chip-enabled machine you purchase.

1Elavon is City National’s exclusive provider of Merchant Services. Services provided by Elavon are subject to a separate agreement and terms provided at the time of application approval. Limited-time offer available from Elavon between October 1, 2014 and December 31, 2014. A processing account must be established with City National Bank and Elavon to take advantage of this offer. Discount will be applied upfront to the purchase of select equipment, including the Verifone VX520 or Ingenico ICT250 for $575 plus applicable taxes. Other equipment options are available at standard pricing. This offer can be modified, voided, or discontinued at any time.