After the chip card: A chargeback tsunami?

by Daryl Cornell, CEO, Triton Systems

Three jaw-dropping lessons from Canada!

Use this quick trick to see what "post-EMV" looks like!

Caution, EMV trouble ahead!

At the risk of sounding like the new Weather Channel website, can we learn anything about EMV conversion from our friends up north? After all, they have already upgraded or replaced more than 60,000 ATMs to accommodate EMV. Has this had any impact on the level of debit fraud in Canada?

While ATM EMV conversion in the U.S. will be different in a number of ways — including the fact that it will up to seven times larger — dismissing Canada's EMV experience would be a mistake.

Two years after the 2010–2012 regulatory mandated conversion to EMV, Interac, Canada's debit card payment network, posted some eye-popping statistics on its Web site.

Three key takeaways from Canadian EMV implementation as seen in the Interac numbers are as follows:

EMV adoption drastically reduces debit fraud

Total debit fraud in Canada was more than CA$142 million ($114 million) in 2009. By 2014, just two years after EMV adoption, total debit fraud had plunged to just over CA$16 million ($13 million).

Even more startling are the domestic debit fraud statistics. In 2009, more than CA$139 million ($112 million) of that previously mentioned $142 million in debit fraud occurred in Canada. By 2014, debit fraud occurring in Canada had been reduced to just over CA$2 million ($1.6 million).

EMV adoption drastically reduces debit fraud per ATM

Canadian ATM numbers have remained relatively stable over the last seven years, hovering at between 58,000 and 68,000 terminals. Domestic debit fraud at the ATM averaged nearly CA$2,400 ($1934) per terminal in 2009. By 2014, that figure had been slashed to a mere CA$33 ($27) per terminal.

An interesting aside is that all non-EMV ATMs were turned off by Interac in December of 2012 — a reduction of nearly 1,000 terminals. In 2013, Canada saw a sharp increase in ATMs as many of these machines were upgraded or replaced.

EMV adoption causes debit fraud to migrate

Nearly 98 percent of all Canadian debit fraud occurring in 2009 was domestic. By 2014, that number had plunged to less than 14 percent.

Conversely, the international component of Canadian debit fraud rocketed up from just over 2 percent in 2009 to more than 86 percent in 2014. Presumably, much of that fraud moved to the U.S., currently one of the last magnetic stripe-only holdouts.

The migration of Europe (2004) and Canada (2012) to EMV has already resulted in a wave of cross-border debit fraud in the U.S. Card schemes and issuers have continued to absorb much of these fraud costs, mitigating as much as possible through the use of sophisticated algorithms and the blocking of cross-border transactions at a majority of retail ATMs. This blocking of cross-border transactions by the card schemes has been hugely expensive, throwing out a large number of legitimate transactions along with the fraudulent ones.

Wait and see?

Once these blocks are removed in 2016, as MasterCard and Visa claim they will be, non-EMV IAD and merchant terminals will be fully exposed to both domestic and cross-border debit fraud chargebacks.

With no legislative mandate to upgrade to EMV in the U.S., many merchants and IADs will take a "wait-and-see" approach. A glance northward may help to shine some light on the magnitude of the chargeback tsunami headed our way.

cover illustration istock | hokusai