Small businesses are moving ahead with an EMV lawsuit

Small businesses are moving ahead with an EMV lawsuit

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A federal judge in California will allow an EMV-related antitrust and conspiracy lawsuit filed by two small retailers against the major US card networks to proceed into the discovery phase, according to a press release.

If it escalates further, the suit could become a class action and ultimately leave a big impact on card networks implicated.

The merchants believe that card providers colluded to make the EMV migration as self-beneficial as possible.

  • As more small businesses upgrade to EMV, a bottleneck is emerging. When a merchant receives a terminal, they must go through a time-consuming and lengthy certification and activation process before they can begin accepting payments. Growing merchant interest has led to a backlog in certifications and activations that has forced chip-enabled merchants to continue processing chip cards as magnetic stripe transactions as they await activation.
  • That’s caused an uptick in merchant fraud costs, according to the plaintiffs. Card fraud continued as merchants awaited certification. But because the EMV deadline shifted liability to the noncompliant party, that means that any fraudulent transaction in which a chip card was swiped because of a non-activated terminal fell on the shoulders of the merchants. The two plaintiffs complained they faced 88 chargebacks worth over $9,000 on top of a $5-per-transaction fee — a significant financial burden.
  • And, in their eyes, these policies were designed to make merchants shoulder these costs. The terminal certification and activation process is designed and implemented by card networks. The merchants allege that the burden of fraud was intentionally shifted towards them and away from card providers during this wait. And though card networks have implemented policies to resolve the chargeback issue and ease activations, they only occurred after the lawsuit was filed, according to Credit.com

If the lawsuit becomes a class action, it could shift the way card networks work with merchants with regard to upgrade. If the suit is approved as a class action, it could cover millions of merchants. That could deal a major blow to card networks, especially at a time following other EMV- and fee-related lawsuits from retailers like Walmart and Home Depot. The barrage of lawsuits could lead to merchant compensation, which could drag revenue, or revised policies to become more merchant-friendly.

Fraud cost U.S. retailers approximately $32 billion in 2014, up from $23 billion just one year earlier. To solve the card fraud problem across in-store, online, and mobile payments, payment companies and merchants are implementing new payment protocols that could finally help mitigate fraud.

John Heggestuen, senior research analyst for BI Intelligence, Business Insider's premium research service, has compiled a detailed report on payment security that looks at how the dynamics of fraud are shifting across in-store and online channels and explains the top new types of security that are gaining traction across each of these channels, including on Apple Pay.

Here are some of the key takeaways from the report:

  • EMV cards are being rolled out with an embedded microchip for added security. The microchip carries out real-time risk assessments on a person's card purchase activity based on the card user's profile. The chip also generates dynamic cryptograms when the card is inserted into a payment terminal. Because these cryptograms change with every purchase, it makes it difficult for fraudsters to make counterfeit cards that can be used for in-store transactions.
  • To bolster security throughout the payments chain encryption of payments data is being widely implemented. Encryption degrades valuable data by using an algorithm to translate card numbers into new values. This makes it difficult for fraudsters to harvest the payments data for use in future transactions.
  • Point-to-point encryption is the most tightly defined form of payments encryption. In this scheme, sensitive payment data is encrypted from the point of capture at the payments terminal all the way through to the gateway or acquirer. This makes it much more difficult for fraudsters to harvest usable data from transactions in stores and online.
  • Tokenization increases the security of transactions made online and in stores. Tokenization schemes assign a random value to payment data, making it effectively impossible for hackers to access the sensitive data from the token itself. Tokens are often "multiuse," meaning merchants don't have to force consumers to re-enter their payment details. Apple Pay uses an emerging form of tokenization.
  • 3D Secure is an imperfect answer to user authentication online. One difficulty in fighting online fraud is that it is hard to tell whether the person using card data is actually the cardholder. 3D Secure adds a level of user authentication by requiring the customer to enter a passcode or biometric data in addition to payment data to complete a transaction online. Merchants who implement 3D Secure risk higher shopping-cart abandonment.

In full, the report:

  • Assesses the fraud cost to US retailers and how that fraud is expected to shift in coming years
  • Provides 5 high-level explanations of the top payment security protocols
  • Includes 7 infographics illustrating what the transaction flow looks like when each type of security is implemented.
  • Analyzes the strengths and weakness of each payment security protocol and the reasons why particular protocols are being put in place at different types of merchants.

To get your copy of this invaluable guide, choose one of these options:

  1. Subscribe to an ALL-ACCESS Membership with BI Intelligence and gain immediate access to this report AND over 100 other expertly researched deep-dive reports, subscriptions to all of our daily newsletters, and much more. >> START A MEMBERSHIP
  2. Purchase the report and download it immediately from our research store. >> BUY THE REPORT

The choice is yours. But however you decide to acquire this report, you’ve given yourself a powerful advantage in your understanding of payments security.

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