The federal government’s push toward EMV technology marks a significant milestone in the ongoing effort to strengthen payment security and reduce fraud. Through a new executive order, government-issued payment cards will be required to support chip and PIN authentication, accelerating the broader adoption of EMV cards across the payments ecosystem. While the move is intended to improve payment card security and combat identity theft, it also raises important questions about implementation costs, merchant acceptance, and the readiness of issuers and program managers to meet aggressive timelines. As the transition unfolds, the initiative could have far-reaching implications for prepaid cards, government payment programs, and the future of secure payments in the United States.
President Obama signed an executive order today that requires the federal government to use chip and PIN technology on all of its payments cards and to change the point of sale terminals in places like national parks to accept chip and pin cards.
While there is no silver bullet to guarantee data security, the President is signing an Executive Order to implement enhanced security measures, including securing credit, debit, and other payment cards with microchips in lieu of basic magnetic strips, and PINs, such as those standard on consumer ATM cards. He is calling on all stakeholders to join the Administration and a number of major corporations in driving the economy toward more secure standards to safeguard consumer finances and reduce their chances of becoming victims of identity theft — America’s fastest-growing crime.
The language of the order is interesting because it requires that the cards use chip and PIN while many issuers were planning to use chips with signatures. The factsheet also says that the cards must have chips in lieu of magnetic strips, and then later says “These new systems will, at a minimum, meet the global security standard of more secure microchips to store card numbers instead of unencrypted magnetic strips, and secure PIN functionality, like the kind featured on most ATM cards.”
Could this mean that government cards will be the first to have no magnetic strip at all? It certainly looks that way, however it is uncertain the government recognizes how much this will restrict acceptance, especially at ATMs, restaurants and gas stations. The fact sheet says that the government plans to begin replacement of the cards in January 2015, beginning with the prepaid cards issued for Social Security recipients. Mercator estimates that there are about 3 million of these cards in circulation, which, depending on the cost per card, could mean a cost of anywhere from $15 to $20million to replace. Of course, the other issue is making sure that the card manufacturers actually have the capacity to produce the cards. Getting to the front of the line could increase the costs even more. Certainly the issuing bank will want to be compensated for the costs of reissuing these cards
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While the order seems to cover only those cards that are issued in conjunction with government programs, it is easy to see how they might extend to any program that wants to be eligible to receive government funds. This could affect prepaid program managers who were planning to delay EMV implementation and force them to make costly changes before they are ready.
The order also has provisions for increasing the authentication on data released by the government to citizens, improving identity theft resources, and increasing credit score transparency.
Now, it may be that the order gets refined as the payments industry works to educate that government about what the provisions mean from a practical standpoint. The industry should be prepared to do so to avoid getting caught up in deadlines for changes that are more aggressive than what the industry had planned.
Overview by Tim Sloane, Vice President, Payments Innovation for Mercator Advisory Group
