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The EMV slowdown is still hitting terminal vendors
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Point-of-sale (POS) terminal vendor Ingenico noted in its Q3 2016 earnings call that it is still feeling the pain from the switch to chip cards in the US, even a year after the initial shift in who's liable for fraud on non-EMV card transactions.
The firm posted a solid 7% growth constant currency overall, but its North American segment declined by 31% in the quarter, largely a result of delays in the EMV migration. That slowdown was so profound that the losses it caused overshadowed market share gains in key verticals made by the firm during the quarter.
To illustrate the impact of the US decline, growth would have been 18% overall excluding North America and Brazil, another weakness for the firm. This is an ongoing problem for Ingenico, which reduced its targets for the fiscal year last month.
Complexities in EMV terminal activation are hurting terminal vendors across the board.
Interest for EMV terminals is rising. Small business owners, which had previously been hesitant to upgrade to EMV, are becoming more willing to upgrade — over half of small businesses had upgraded to EMV terminals in Q3 2016, up from just 31% a year earlier. That’s likely because a proliferation of chip cards among consumers mean that it'll be easier to reap fraud benefits, which makes the cost of the upgrade feel more worthwhile.
But though that seems like a boon for firms like Ingenico, a backlog in the process is causing losses. Once a merchant receives an EMV-enabled terminal, they must still install, certify, and activate the terminal before it can begin accepting payments. That process is time-consuming and complex, and rising interest has caused a bottleneck that’s led to an industry-wide slowdown in activations. That could deter interested merchants from buying, because they don’t want to have to pay to upgrade only to wait months to gain the benefits. But it could also impact profits in other ways — Verifone, one of Ingenico’s competitors, noted that it often bundles other services to EMV sales, but can’t profit from them until the terminals are running. That could also be the case with Ingenico.
Ingenico will have to rely on other strategies for growth as the migration resolves itself. The firm is developing a new, vertical-focused strategy, likely to try to gain ground in key areas as a move to offset some of the losses associated with EMV through the next several quarters. But the firm could also look to high-growth areas, like its revitalizing ePayments segment, which grew by 22% in Q3 2016 despite challenges earlier in the year, in order to post growth and offset EMV-related friction.
And yet despite all of these hurdles, EMV remains crucial for payments security.
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:
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
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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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