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.

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?

Merchant A and Merchant B Explain the Dilemma of EMV

The latest act in the Kabuki drama over exactly how to implement EMV in the U.S. has dragged on since October 2012. That’s when the Secure Remote Payment Council framed the issue that was on everyone’s mind: How to implement EMV in an equitable manner.

Five months later ten of the Pin Debit Networks followed up by adopting a common U.S. Debit Application Identifier, or AID.  Then nothing.

But just like an auction where no bids get placed till the clock ticks down to the final seconds, this week saw a flurry of activity as the prime-time players in the U.S. EMV implementation drama finally started getting down to formal proposals as implementation deadlines approach.

The first player to move was the SRPc. It proposed to the Big Brands, Visa and MasterCard, to begin discussions with SRPc and its Chip and PIN Working Group on an AID solution that points to an application that is owned and governed by all parties. For a discussion on the AID issue, scroll down to the prior post.

The SRPc proposal gets to the crux of the debate: Who will own the technology that will be used to route transactions in an EMV environment?

Understanding what AIDs are, the difference between AIDs and applications, and why this all makes such a difference may be hard to figure out. But to its credit, SRPc used a simple, but elegant, analogy to explain why the AID issue is hanging up this debate.  

Use of any proprietary AID, according to the SRPc analogy, is like walking through the door of Merchant A to buy something from Merchant B. That is, if the Pin Debit Networks buy into the use of any proprietary AID developed by Visa or MasterCard, they would subordinate themselves to that brand. 

The PDNs, working through their membership in the SRPc and their participation in the PIN and Chip workgroup, are essentially imploring the brands to work with them to create or enter into a compromise that would ensure the licenses used in permitting use of the underlying technology/application, whatever it is, turns out to be something they own in perpetuity.  In turn, this would create an equal and level playing field with fear of reprisal from any ‘owner’ of the technology ‘down the road when the licenses begin to expire.’

How did the Brands react? Visa seemed to take exception to the proposal. MasterCard’s response was, well, no response at all.  

The SPRc’s proposal is something that potentially removes a barrier from the discussions regarding the adoption of a Common U.S. Debit AID. It appears an equitable starting point in the final act of this drama. The next move belongs to the Brands.  

4 Significant Factors That Will Determine the Course of EMV Migration

There are many issues regarding the onset of EMV into the US payments infrastructure that have yet to be ironed out and/or fully understood. But there are four right now that stand out, and on which the shape of the U.S. EMV implementation rests.  Discussions over the last year have turned up a raft of issues that have to be resolved.  But these four stand out because how they are decided will ultimately help determine what EMV will look like here.

Over the coming weeks, EMV Update will explore these four factors along with others that emerge as the U.S. payments industry continues its evolution into the realm of smart card technology. 

Here are the four issues EMV Update sees as most significant in determining how EMV will roll out in the U.S.:

1.       U.S. Common Debit AID –This is the chip’s payment application that identifies the available networks to which an authorization request can be routed.  It’s up to the merchant to actually put the transaction into the routing infrastructure.  Four viable applications are available for use under different licensing agreements from either the major card brands like Visa or MasterCard or a consortium called CommonCo.  CommonCo. was formed by 10 ten of the 18 PIN-debit networks (PDNs) in the U.S. under their affiliation with the Secure Remote Payment Council or SRPc.  Issuers have been waiting for one of these applications providers to produce a set of specifications.  To date, a spec is missing and, with it, the pathway for implementing PIN debit in the U.S. under EMV.

2.       The EMV Business Case – Many of the merchants who must bear the brunt of EMV’s implementation costs, are saying they don’t have the kind of fraud that justifies EMV’s costs.  They’re essentially saying they’re indifferent regarding the liability shift.  This issue will be explored further in coming weeks.

3.       Card Not Present Fraud – Every country that has implemented EMV has watched their CNP fraud grow exponentially.  To date, there doesn’t seem to be a solution.  But is there?  Can we develop one?  With whose help?  Another hot topic.

4.       Contactless – Is there a role in EMV for contactless technology?  Can we find ATMs in the world that can be activated with a contactless EMV card?  And if the answer is ‘no,’ what does that mean for Near Field Communications technology?  For a future blog post.

EMV implementation in the U.S. leaves much to be discussed in future posts.  C’mon back. We’ll give you an honest analysis of what’s happening with these four issues and how they’ll impact what may or may not be in your wallet in the coming years.http://www.cvent.com/events/emv-migration-forum-meeting-june-13/custom-19-403fa5c3460d4d8e81eb221ee1b2a08f.aspx