Wal-Mart And Chip-And-PIN: Where's the Business Case?

A 403 Labs QSA, PCI Columnist Walt Conway has worked in payments and technology for more than 30 years, 10 of them with Visa.

Wal-Mart is waging an aggressive campaign to get the U.S. to adopt Chip-and-PIN (EMV). What I don't understand is why Wal-Mart is doing this. What is the business case?

I can imagine a few scenarios, but none seems to be the answer. This issue is important to every retail CIO, so we need to understand what Chip-and-PIN will and won't do, in addition to what the business case, if any, is for the U.S. and other markets to convert from magnetic-stripe cards to Chip-and-PIN cards.

Personally, I wish I had an EMV chip card today. I really do. When I travel to Europe, I'd love to be able to ride a Velib rental bike in Paris or buy my rail ticket from a self-serve kiosk instead of waiting in line, but these services take only chip cards. I would gladly pay my U.S. card issuer extra for the option of an EMV card.

Although I've heard stories about travelers having their mag-stripe-only cards rejected by European merchants, this has never happened to me, even in small villages. My own reaction is that while merchants may sigh and pity me, and my card's backward technology, the problem is more likely to be that they prefer cash. When that's the case, I just find an ATM (many of which still rely on even the chip card's mag stripe anyway) and go with local currency.

What I don't get, though, is why Wal-Mart wants me to have a chip card. What's in it for them? I'll begin by ruling out altruism. That means I'm looking for a business justification.

Will Chip-And-PIN Ease Its PCI Burden Or Reduce Its Compliance Costs?

Not really, as we've noted before, because Chip-and-PIN won't help much. Retailers will still have key-entered transactions; mail order and telephone order (MOTO) transactions aren't going away; call centers will continue to exist; E-Commerce transactions won't be affected; and back-office operations that use the PAN will continue to do so.

If It Isn't PCI, Could There Be A Competitive Reason?

For example, Wal-Mart may be ready to make the transition to Chip-and-PIN, but are other retailers equally prepared? Are smaller merchants or chains that do not have the global reach and technology capabilities of a Wal-Mart ready to implement Chip-and-PIN? Moving to Chip-and-PIN would place a technical and financial burden on these competitors and give Wal-Mart an advantage. Personally, I find this reason a bit too Machiavellian to believe. (Actually, I really don't want to believe this one.)

Is Wal-Mart Looking For An Interchange Fee Break?

If U.S. card issuers decide to move to Chip-and-PIN, they may need to offer merchants an incentive to make the necessary upgrades to their POS and other systems. Years ago, the card brands successfully offered incentive interchange reimbursement fees (anyone else remember TIIF?) to get merchants to install electronic POS terminals. Maybe Wal-Mart thinks history will repeat itself, and that it will benefit more than most from reduced interchange?

European issuers (beginning in France) introduced Chip-and-PIN cards because a phone call cost too much. The cost to authorize a card transaction back to the issuer was so expensive that issuers and merchants had to find an alternative. The result was Chip-and-PIN, which can authenticate a card and cardholder at the POS and minimize the need to call the issuer to authorize the specific transaction. You could think of Chip-and-PIN as a high-tech floor limit.

Chip-and-PIN never took off in the U.S. market, though, for several reasons. First, it costs almost nothing to authorize a card transaction. Phone calls are cheap, so a merchant with a POS terminal (which is a glorified phone, after all) can authorize a transaction with the issuer. And an issuer authorization is the gold standard, better than simply authenticating the card and cardholder.

Second, chip cards cost more to produce than magnetic-stripe cards (although the cost difference is shrinking) and U.S. issuers and merchants do not want to spend extra money either on cards or sophisticated terminals and PIN entry devices.

Another reason Chip-and-PIN hasn't taken off in the U.S. market is that issuer fraud losses are low. With their investment in sophisticated systems and ability to analyze every transaction as it is authorized (which is not possible under Chip-and-PIN because there are fewer authorizations), issuers have reduced fraud to a level they seem to be able to live with.

So I come back to my original question: Why is Wal-Mart pushing so hard for Chip-and-PIN? Consumers aren't yelling for Chip-and-PIN because they are already protected from fraudulent card use. And the banks that bear the fraud risk don't seem to think it's worth the investment. Although, as a consumer, I hope Wal-Mart is successful, and I have no doubt that the U.S. and every other market will convert to chip cards some day, I don't understand the giant retailer's sudden enthusiasm.

What do you think? Clearly I'm missing something. I'd like to hear your thoughts, particularly if you are a European or Canadian merchant. What is your experience? Either leave a comment or E-mail me.