Retailers Say It's PIN, Not Chip, That Cuts Card Fraud

Visa and MasterCard have got it backwards on EMV, according to some retailers—it's PIN that cuts fraud rates, while the PIN-less EMV that card brands are mandating will be all cost and no benefit. That's the argument executives from Wendy's (NASDAQ:WEN), Costco (NASDAQ:COST) and Sinclair Oil made at a payments conference last week, Digital Transactions reported.

Because customers have already accepted PIN as a security measure, "Our actual fraud rate is so small it's hardly worth mentioning," said Gavin Waugh, VP and assistant treasurer at Wendy's. Sinclair VP of IT George Odencrantz said 80 percent of Sinclair's transactions are PIN-based, so EMV won't add much fraud protection, but will cost $40 million to implement. Costco is even looking at PIN for e-commerce, where EMV will be useless, said Costco assistant treasury VP Rue A. Jenkins. All three spoke at the Nacha Payments 2013 conference in San Diego on Tuesday (April 23).

Visa (NYSE:V) and MasterCard (NYSE:MA) have set an October 2015 deadline for retailers to have EMV-capable point-of-sale devices or be liable for any payment card fraud. But the card brands aren't requiring that customers use PINs, apparently under the impression that there will be customer resistance to the PINs. Retailers say that's exactly wrong.

At least one economist who has dug into the statistics agrees. Richard J. Sullivan, a senior economist at the Federal Reserve Bank of Kansas City, said in a just-published paper that when EMV cards were introduced in the U.K., card fraud almost doubled in the first three years because the new EMV cards also supported magnetic-stripe terminals for backward compatibility. Once mag stripes were removed and PINs were required, fraud dropped again.

The problem, of course, is that mag-stripe cards have proven to be exceedingly difficult to displace. Customers are already forced to use PINs at ATMs, so they've been trained for that. Getting them to replace swiping with putting an EMV card into a slot might turn out to be just as easy a shift, but making PINs optional and keeping a mag stripe on the cards appears to be the worst of all worlds.

For more:

- See this Digital Transactions story
- See this Finextra story
- See the Federal Reserve Economic Review research paper

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