Showtime!

We’re into October. The leaves are turning, the bow hunters are in the trees, the World Series is around the corner and it’s conference season for the financial services industry.

Two weeks ago we had the ATM and Mobile Executive Summit, jointly hosted by the ATM Industry Association and the ElectronicFunds Transfer Association. Last week we had Money 2020 in Las Vegas. Up next is the ATM, Debit and Prepaid Forum, followed in early November by EBT—the Next Generation 2013, the premier e-government payments show in the country.

The message of mobile wallet weaver Isis its Money 2020 audience was “you seen seen nuthin’ yet.” The Isis dream weavers see a world reshaped with mobile technology by the end of this decade. Theirs is a world where half of all transactions will be mobile by 2020.

If anything, Money 2020 showed the payments industry that its horizons must expand.  It’s no longer enough to have a single-focus show that just caters to ACH, or ATMs, or POS.  New technology like mobile will re-define all of those payments technologies and more. You can’t look at them in a vacuum. Make way for the inter-industry show.

Despite the focus on alternative payment technology, Money 2020 also showed that EMV continues to hold center stage as the topic most on the minds of the people who design and manage our payment systems.

The message about EMV was clear.  The fraudster factory continues to turn out taller and taller ladders to breach higher and higher payment-security walls. So the mission remains to find the best way to secure consumers’ transactions at the point-of-sale. Until somebody comes up with something better, that looks like EMV.

Some people will argue that as the world’s biggest economy we don’t have to march to the rules of other countries. We get to make our own rules. Others will say there is no business case for EMV. Still others will say that the venerable magnetic stripe will be around for a long time, making the argument for global interoperability a red herring.

All of this may or may not be true.

But its too bad consumers don’t get to vote in this debate. Because I think they’d say that anything that reduces their chance of being defrauded and incurring the pain of rebuilding their financial accounts and reputation is a good thing.

So, in the final analysis, the business case doesn’t matter, what the good folks in Lichtenstein are doing doesn’t matter, nor do the two EU tourists a year that visit Kelly Galloup’s fly shop in Cameron, Montana matter much. What matters is that U.S. consumers retain their historic confidence in the electronic payments system—a confidence that wanes with every skimming story in the local news—and continue to pull out the plastic at merchant locations. That’s what really matters in this debate. 

Certainly there are legal and political dimensions to EMV. But the Durbin Amendment and the Leon smack down of the Fed should be sideshows to the center stage. And that remains occupied by a vast cast of characters trying to overlay EMV on the world’s biggest payment system.

Sure, Money 2020 showcased many alternative payment schemes, including Bitcoin—either the most liberating, democratizing payment event in he history of man or payment disaster waiting to happen, depending who you talk to. Interesting. Provocative.  But at the end of the day, over cocktails in the bar, where business really gets done, the story was still EMV.  

Launching EMV in the U.S.

The EMV Migration Forum (EMV) held its quarterly meeting last week in Dallas. One hot topic was a launch project for EMV in the U.S, or USEMV. Target date: fourth quarter 2014.

This working committee has targeted Orlando for the launch USEMV. But the committee is a little like the dog that finally caught the car.  It’s gotten to the point of launch. But what do they do now?  

EMF has been diligent in trying to bring together multiple disparate forces to launch EMV in the U.S. It’s already lined up a number of these participants for the Orlando kick-off. These companies are already reviewing and editing a draft memorandum of understanding they would all use in the launch of USEMV in Orlando.

Theese participants include acquiring processors, issuing banks, the Big Brands (all of them), card manufacturers, regional debit networks and merchants. 

Somehow one key stakeholder, Ma and Pa Cardholder, missed their invitation. But we’ll get to that.

There’s no doubt that the EMF has worked hard just to get to this point.  But now like that dog staring up at the rear bumper, EMF faces some critical decisions. These begin with getting its arms around just how big a task it has on its hands.  The decision coming out of Dallas on how to do that is to build a Project Management Office.

I’ll cop to the fact that project management will be critical to ensuring that EMV doesn’t end up in the recycle bin next to the playbook for metric system adoption. EMF realized that once EMV is injected into the U.S. payment ecosystem it will touch every aspect of that ecosystem. How we pay for groceries at the supermarket. How we check our balance at an ATM. And eventually, how we buy that pair of killer shoes at zappos.com.

Which brings us back to Ma and Pa Cardholder.  The consumer educational issues alone could sink this project.  We’ll know we’re in trouble when Ma steps up to the teller line in her bank and tells the clerk her card hasn’t worked since she picked that ugly gold foil off the front.

So consumer education could be a project in and of itself. And getting legal clearance for an MOU from legal departments at multiple, disparate companies could be its own project. Then there is the mission, the project charter and probably the most important task—the budget. As my first CFO in this business reminded me, everything in this business—fortunately or unfortunately—comes down to money.

This all goes beyond a PMO. USEMV will require a lot more than that. A project of this scope needs oversight of the whole field, an ability to anticipate when and where problems will occur, and the acuity to adjust as circumstances are breaking down. That’s a lot different than checking off tasks on a project plan.

So try this on: running such an initiative may represent an opportunity for the not- profits and associations that track and cater to the payments industry. To date, there has been overriding business case for most of the players in EMV. So a non-profit or association will walk into this role without unrealistic expectations. But the result of dedicated project leadership will be a body of knowledge that will be necessary for moving forward from market to market in order to make EMV a reality in the U.S. That education will benefit everyone in this industry. And isn’t that why these associations exist?

Now, if Pa can only figure out what Ma wants those killer pumps for…

How Will Discover's Membership in EMVCo. Affect EMV Migration in the U.S.?

Recently we reached the latest milestone on the yellow brick road to USEMV implementation.  On September 3 Discover announced that it had taken an equity stake in EMVCo.  For the uninitiated EMVCo. is the international entity that administers the standards for EMV. This is important because now all four of the major brands marketing payment cards in the U.S.—MasterCard, Visa, American Express and now Discover—have seats at the table where the EMV rules get made.  Sort of like a Justice League of payment brand superheroes.  

Although Discover joining EMVCo. didn’t get a lot of attention at the time, it really is a significant development for USEMV implementation. Astounding, really.  

Why? Consider the eight month-long effort by the Secure Remote Payments Council to keep the PIN Debit Networks relevant after EMV is implemented in the U.S. Those are largely documented below in previous posts. The anticipated launch of SRPc’s CommonCo later this month is the most recent move in this direction. CommonCo’s development was spurred by the agreement between PDNs to get behind a common debit application for EMV.   

Do you want to guess who spurred this effort? How about the newest caped crusader sitting around the Justice League payments table?

 So now we have a PDN owner with equity in EMVCo.  Where do we think this might lead?

 Pulse, the network owned by Discover, has been one of the most outspoken PDN voices since it became apparent about eight months ago that there might not be a big play for PDNs in EMV.  Since then Pulse has worked closely with its owner to ensure an application for EMV would include the PDNs as an alternative routing network in compliance with Regulation II of the Dodd Frank Act. 

Pulse was influential in the development of CommonCo and is a leading voice at the SRPc meetings where CommonCo’s rules are being written.  And their egalitarian approach  stands in stark contrast with the game of shadows being played by the Big Brands.

The question remains whether Pulse and Discover have done all they can do to ensure their card-issuing bank customers continue to see the value that PDNs bring to the payments industry. 

Of course, before that happens, the industry has to survive the uncertainty caused by Federal Judge Richard Leon and his ill-timed decision throw out two years of Solomonic  work by Federal Reserve Board analysts to set equitable debit interchange rates. I might lecture here about what happens when the government tries to fix prices, but that’s a post for another day.

The EMV Forum has a scheduled meeting next week in Dallas. The elevation of Discover to EMVCo. should help liven things up in the cocktail lounge. With the Brands migrating their strategy to behind closed door sessions, it looks like they may have inadvertently left a door open that could permit SRPc and CommonCo to lobby card issuers at a time when they should be making decisions about routing debit in a post-USEMV market. 

Word has it that some of the Brands’ reps are not planning on being in Dallas for the EMF meeting. That should calm the waters a little. Maybe EMF could get Judge Leon to come speak on what he was thinking when he issued his decision. That would liven the place up.

It's Time to Move Forward with an EMV Debit Solution

It’s becoming clearer that the EMV Forum’s Debit Working Committee is struggling to maintain the momentum it built on the back of the double debit debacle caused by, first, Senator Durbin’s eponymous Amendment, and now, Judge Richard Leon’s Federal Reserve Board interchange interdiction.

  The Big Brands, Visa and MasterCard, continue to give the industry the silent treatment when it comes to questions about their proposed EMV debit application solutions and which might be issuer-worthy.  Their cover for going dark is the uncertainty caused by Judge Leon’s ruling and the FRB’s appeal.  This could go on for a year, maybe more. If it does, what do the PIN debit issuers do for EMV while they wait out the appeal process?

The payments industry has always functioned with a degree of uncertainty.  That uncertainty is managed by risk controls that consider the alternatives and then build solutions accordingly.  But in the case of EMV, that uncertainty is providing the Brands with deep cover against any unwanted scrutiny by the people outside of the Brands’ inner circles.  So we wait.  Until when?  Note that EMF Debit Working Committee meeting normally scheduled for Tuesdays was repeatedly canceled during July and August. Tough to have a conversation when one side won’t talk.

The waiting game is good for relationships, maybe.  It’s like surprises, which are good for our kids, our mates and our courtships.  But it has no place in business. 

 

Business abhors inertia. And surprises. We plan. 

We consider the possible alternative outcomes, assign probabilities to those outcomes and calculate the ‘expected value’ for any given outcome or situation.  So why is that not happening now?  Indeed, is this a case of ‘any port in the storm?’  Are the Brands rethinking their involvement in EMF?  What did they think they had to gain by joining an industry working group in the first place?

The Debit Working Committee of the EMF is soliciting agenda items for the September 17 and 18 EMF meetings in Dallas.  The Tag Group will present their proposed solution but is refusing to put that solution in writing until the Leon dust settles.  At least we’ll know what their proposal is and hopefully, be given the tools to know whether it’s something issuers can live. 

And the AID issue?  It will remain unknown at least until mid-September.  Of course, at that point in time, we’ll be two weeks away from the formation of CommonCo.  And launch of that entity should lead to a comparison of the AID solutions being proposed by SRPc, Visa and MasterCard. 

We’ve submitted an agenda item for the September meetings – to allocate time for the technology providers to show everyone the value their solutions bring to the industry.  We hope Debit Working Committee accepts this agenda item for the Texas meeting.

Time’s running out. As they say down in Texas, time to git all the liars ‘round one table…

You're Going to Need a Bigger Courtroom

Just when you thought it was safe to go back into the water, along comes U.S. District Court Judge Richard Leon. On disputes such as the never-ending drama over interchange we generally look to the courts for clarity and definition. In Judge Leon we have neither.

In his July 30 decision in NACS, et al. v. Board of Governors of the Federal Reserve System Judge Leon ordered the Fed to vacate its original rule that capped the interchange fees that banks could charge merchants for authorizing their debit card transactions, and start over.

The Court found that the Fed violated §920 of the Electronic Funds Transfer Act , commonly known as “the Durbin Amendment” when it set the interchange fee caps by considering any costs other than the variable costs incurred by the issuer in processing each debit transaction. In reaching his decision Judge Leon relied on no less a funds-transfer expert than Sen. Dick Durbin himself, basing his decision in part on the Congressional Record.

The Court in Judge Leon’s decision also addressed §920’s thorny issue of network exclusivity. But that’s a post for another day. Between the U.S. District Court, Sen. Durbin, the Fed Board, the merchants and the networks there’s almost too much good material for one blog.

In a move that was either expected or unexpected, depending whom you side with in this drama, comes word that the Fed has filed an appeal of Judge Leon’s decision. On Wednesday, August 21 the Fed’s top legal gun went before Judge Leon to ask for a stay of the Court’s ruling pending the Fed’s appeal.

However, in another plot twist the plaintiffs in the case, the merchants, agreed with the Fed’s decision to seek the stay. Their rationale: with the original rule vacated, the card issuing banks could charge merchants as much as they want during the period while the appeal works its way through the courts.

So where does this leave the discussion about EMV implementation?  In the end the PIN debit solutions for EMV that we’ve blogged about for several weeks may have to be shelved, depending on the outcome of the court drama.  The EMV Forum has decided to delay publishing its proposed solution, although they intend to talk about it at the next EMF meeting in Dallas in September.

 Visa steadfastly refuses to provide updates to its U.S. Common Debit AID solution until the curtain drops on this legal drama.  MasterCard is likewise going to bide its time.

 In the meantime, what will the card issuing banks, who have been the lead actors in a silent movie on EMV, do if the Judge Leon’s ruling stands and kills the business case for EMV? 

As often happens in the Theater of Unintended Consequences the Fed interchange rules, intended to lower interchange, have actually driven up card handling costs for many small merchants, say some critics.

 Card companies used to authorize lower fees for small ticket items, goes this narrative. Under the new rules such differentiation was disallowed, meaning fee rate for a debit purchase of a pack of Twinkies could be the same for a down payment on a car. Will this seeming incongruity now force the consumer lobby to mobilize on the issue of interchange?

A lot of questions, but as has been the rule with the Durbin amendment, and now EMV, few answers. 

The Price of Silence and What About that Business Case?

As you may recall from the previous post, Visa and MasterCard on July 30 made a joint announcement of their intention to co-license their PIN debit routing application technology.

 So what’s happened since then? The answer is more like what hasn’t happened. Two weeks of meetings of the Debit Working Group of the EMVMigration Forum were canceled since the Brands made their big announcement.  Coincidence?  Something more nefarious?  Something in between? 

The next working group meeting is scheduled for Tuesday, August 20. So far this meeting is still on track.

Part of the industry silence that has greeted the Brands’ co-licensing announcement may be technical. The entity proposed to manage a common application ID among the Pin Debit Networks, dubbed CommonCo, is not yet up and running. The timetable for that is late September.  That has left a void with no one to speak to the Brands’ joint release on behalf of the PIN debit networks.

The issuers have to be thinking about this.

In the meantime, while the reaction to the Brands’ co-licensing agreement has been muted, there has been plenty of talk about the business case for EMV.  We posted about this several weeks ago.

American Airlines went on the record at a recent EMV Migration Forum meeting to explain why it doesn’t see a need to move to EMV.  According to American, most of its sales are online in an e-commerce setting.  This means they could potentially be exposed to card-not-present (CNP) fraud.  But they’re not even worried about that.

 Indeed, at the CNP Working Committee meeting held earlier this month there was a good deal of talk about how to prevent CNP fraud from escalating once we move the physical POS to EMV. But American expressed some doubt whether they’d have any increase in CNP fraud.

Why?  Because someone buying an airline ticket can’t even get past security to board a flight unless the TSA knows who they are.  And the TSA has nothing to do with EMV.  Indeed, why do any of the airlines need to worry about the liability-shift dates when their customers are forced by the federal government to disclose who they are before they can buy anything or get past security to board a flight?  Answer: They don’t.

Nevertheless, airlines serve people from all over the world and currently the airline countertop infrastructure can only handle mag-stripe transactions. So the airlines will likely make this shift just to ensure worldwide interoperability for payment technology.  (In point of fact, Citibank offers an American Advantage EMV-compliant card for its global travelers.)

Passenger air travel is a high volume, low margin business. It's easy to see EMV as a non-essential expense the airlines will take on reluctantly. We have to wonder how many companies in other merchant categories think the same way.

And whither the Debit Working Committee? We’ll update you next post. 

Where Are the Issuers on EMV?

Well, the Big Brands made their long awaited move.

Last week we talked about the Kabuki drama that is EMV implementation in the U.S. The Secure Remote Payment Council made the first move with a proposal that would ensure a role for PIN Debit Networks in the brave new world of EMV debit payments. We asked you “stay tuned.”  Recall, SRPc had issued a proposal to MasterCard and Visa asking them to consider a compromise in terms of licensing agreements and ownership rights to the application technology the issuers would install for their PIN and signature debit programs. 

As it turns out, the PIN debit networks and SRPc didn’t have to wait long for the Brands' move.

On July 30, 2013, Visa and MasterCard issued a press release that essentially renders the SRPc proposal moot.  The Brands reached a compromise on their own, exclusive of any arrangement with SRPc and D-PAS (Discover’s payment application), which would have allowed for the routing of debit transactions through the PDNs.

This was a jointly issued press release announcing an agreement between just Visa and MasterCard to license each other’s respective common U.S. debit solutions “to meet the industry need for a streamlined approach to route U.S. chip debit transactions over multiple, unaffiliated networks,” according to the release.

But what about Regulation II of the Dodd-Frank Act? The Act’s so called Durbin Amendment requires that merchants have a routing choice of between at least two unaffiliated networks. Let’s look at those words “unaffiliated networks.”  The unaffiliated networks have to be associated with a use case.  Signature was one use case.  PIN is another.  So, for PIN transactions, the unaffiliated networks amount to anything but Interlink if the card carries a Visa brand or anything but Maestro if it carries a MasterCard brand.

So it appears that the cross-licensing agreement means that MasterCard could send everything to Interlink and be in compliance with Durbin. And Visa?  They could send everything to Maestro and ditto – they’d be in compliance as well. 

So what does that mean for Star?  For NYCE?  For Shazam?  For Pulse?  For any of the PIN debit networks? 

Without their software on the EMV chip it appears they’d be cut out of the debit routing business.

And, by the way, where are the card issuing banks on this? Is it in their interest for the PDNs to survive? And what about competition in the network business?

Competition is good.  Having alternatives is good.  On an issue where there are more questions than answers, the Big Question right now is do the issuers feel that way as well?