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Issuers' Fraud Concerns Undermine Innovation for Merchants


In theory, all parties benefit when consumers have their choice of payment options, but the deluge of new technologies has led issuers to respond in ways that could create lasting frustration for consumers and merchants.

Banks are rethinking their approach to risk at the point of sale as they grapple with the simultaneous introduction of EMV-chip cards, mobile wallets and other innovations. This, in turn, is subjecting consumers to inconsistent security requirements based on a growing number of variables.

For example, consumers who are accustomed to making under-$25 purchases without typing a PIN may find that this requirement is reinstated by some issuers but not others, or that a PIN is required when using a mobile app but not an EMV-chip card.

"There are a lot of changes happening, not only with cards, but with mobile payments and the introduction of Apple Pay, so I think each issuer will make that decision and choice as to what they will enable their accounts to participate in," said Stephanie Ericksen, vice president of risk products for Visa Inc.

Ultimately, no one wants to see a legitimate transaction denied, Ericksen said. The card brands want to maintain PIN-less transaction thresholds to decrease any potential friction at the point of sale, she added.

Some issuers welcomed the increased security from Apple Pay, but dropped the ball when it came to authenticating the cardholder at enrollment. The result is that Apple Pay is perceived by some as insecure despite its use of encryption, tokenization and biometrics.

The same inconsistency is seen in the U.S. migration to EMV-chip cards, which are meant to improve security over magnetic-stripe cards.

"Everybody we have talked to from merchant to terminal manufacturer, acquirer to issuer, they are all working toward that goal of making sure we implement EMV in a way to minimize friction and complete the transaction," Ericksen said.

Visa is not aware of any widespread issues regarding PIN or PIN-less transactions, but issuers continue to run fraud monitoring and risk controls on each transaction, she said.

However, the rampant card fraud has all payment companies on edge about how to introduce new technology at the point of sale, said industry analyst Paul Martaus.

"The problem is that we have the reality of a broken marketplace, with cards being hacked by the millions clashing with the ubiquity of the consumer wanting to just make a purchase and go," Martaus said.

It is not surprising that some issuers are more cautious about certain technology than others, leading to different customer experiences based on the payment method used, Martaus added.

Issuers, merchants and card networks "are getting in each other's way," Martaus said. "Consumers will have the final say on this because things could change if everyone gets frustrated and says they are going back to cash."

That means continued advancements and new product introductions, including tokenization for card security, will always raise questions about open standards and whether the payments landscape remains a level playing field, said Terry Dooley, chief information officer for the Shazam PIN debit network.

"We are moving away from ubiquity and interoperability because folks are pushing proprietary technology into the market that ultimately is going to hurt the ecosystem if they don't maintain open standards," Dooley said.

Ultimately, the industry has to avoid the possibility of consumers being denied because of the type of card or mobile wallet they want to use, Dooley said.

One such example was the spotty rollout of Apple Pay. Some stores that could accept Apple Pay at its launch quickly shut off their Near Field Communication devices to block the Apple wallet — and any other NFC payment method, including contactless cards — in favor of the merchant-developed CurrentC app, which has yet to come to market.

But this barrier seems to be breaking down. Best Buy, a longtime holdout for Apple Pay, agreed to accept Apple's mobile wallet in its stores later this year. Best Buy's support of Apple Pay sets a precedent for other CurrentC merchants to follow.

Another source of friction is the growing complexity of point of sale hardware. Merchants must buy EMV-chip card readers to avoid the October shift in fraud liability, but they are not required to support NFC payments or other emerging payment types.

Merchants are hesitant to commit to new technology only to be told that their new devices don't meet some upcoming anti-fraud requirement or federal mandate, said Mark Horwedel, CEO of the Merchant Advisory Group.

"It appears the networks' response is that merchants can always build or buy the necessary hardware and software to overcome the obstacles," Horwedel said.

When the Durbin amendment passed as part of the 2010 Dodd-Frank Act, merchants won the ability to choose from more than one network when routing PIN debit transactions. However, new technologies such as Apple Pay make it harder for merchants to exercise this choice for all transactions.

When issuers decline a PIN-less debit transaction under $25, it may prompt the merchant to handle it as a signature debit transaction instead. This practice is an example "of efforts to circumvent the intent of the routing provisions of Durbin," Horwedel said.

That said, consumers are not going to abandon a purchase at the point of sale any time a PIN-less transaction is declined by the card's issuer, according to Dooley.

"Someone is not going to walk out of a store over it, but it will add some time and frustration in running a transaction a second time," Dooley said.

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