Will Senate Bill Force The U.S. To Go Chip-And-PIN?

With Wal-Mart's recent push for Chip-and-PIN in the U.S., the debate has been what could possibly push the banks into supporting such a costly move. One financial blog is making a compelling argument that the U.S. Senate may be about to jump into the U.S. EMV case.

Todd Ablowitz, president of the Double Diamond Group and one of the more interesting payment experts in the U.S. (for us, "interesting" is someone who thinks a well-balanced presentation is where all audience members are pissed-off equally), has been sitting with lobbyists and studying the Durbin bill, currently scheduled to go before a House-Senate conference committee on Thursday (June 24). His conclusion, with a little bit of mildly tortured logic: The bill will strongly incentivize banks to accelerate their acceptance of Chip-and-PIN in the U.S.

"This bill will likely cause interchange fees to be extremely low for debit transactions, unless the issuing bank complies with fraud prevention technology meeting the standards to be set by the Federal Reserve," Ablowitz wrote. "So banks that do not meet the standards will collect much less interchange and likely will have higher fraud losses (assuming the chosen fraud technology is effective) while banks that do meet the standards will collect much higher interchange, because it will include the technology costs of the fraud prevention, and they will lower losses due to that fraud prevention. Which would you choose?"

Thus far, that sounds solid. He then takes a leap, arguing that the only possible global payment security standard that the Fed could opt for would be EMV and almost certainly Chip-and-PIN.

"The retailers argue that banks have long had a disincentive to improve fraud protection beyond a mag-stripe and signature, because PIN debit interchange was lower (hence less revenue for the banks), and the overall fraud losses on signature debit were much lower than the interchange benefit," he wrote. "Regardless of whether one agrees with this argument, it seems clear this legislation aims to reverse the incentives, leading the banks to adopt EMV and Chip-and-PIN technology much sooner. The chance of EMV adoption in the U.S. just went up in a big way."

It's certainly possible that this bill could help EMV adoption. But Washington is a political town, so many possibilities exist. The bill will certainly not specify Chip-and-PIN or EMV, leaving such matters to be determined by the Fed. In a phone call, Ablowitz said that Congress today is much more retail-friendly than bank-friendly. But the Fed, on the other hand, is a most decidedly bank-friendly environment. (The Fed is comfortable with bankers and generally distrusts large retailers, while Congress sees its constituents comfortable with retailers but suspicious of bankers.)

Given a bill that is vague at best about EMV, will the Fed really push it? Will banks convince the Fed that there are plenty of other fraud-prevention techniques, such as the ones Visa and other brands have already spent millions deploying?

There's an interesting irony here. Retailers want Chip-and-PIN. Even MasterCard and Visa don't really hate Chip-and-PIN, they merely want to resist it as long as they can. It's the banks that are resisting it. But even their resistance is minimal. Just about all of the players concede that some form of EMV will inevitably come to the U.S. The question is "when?"

Even the most aggressive version doesn't have EMV in the States—in a meaningful installed-base way—for three years and quite easily five years. Given that so many security factors will be radically different in five or more years, it's unclear whether EMV would even be anywhere close to leading edge then.

I think Ablowitz is making a fascinating case, but the politics of Washington and the ever-changing state of security more likely mean this bill will have little near-term impact.