Chip Cards: How They Can Improve Your Financial Health

What Is EMV Chip Card Technology?

Deriving its name from Europay, MasterCard and Visa, EMV™1 is a global standard for credit and debit payment cards based on chip technology. Unlike the more common magnetic stripe cards in the U.S., chip cards contain a microprocessor, or smart chip, that allows for the exchange of information between the card, the payment terminal and the bank or processors host. This process requires the payment terminal to perform multiple stages of complex processing to successfully complete a transaction, making it a more secure means of payment. EMV chip cards improve security in card-present sales transactions and help protect issuers, merchants and consumers against losses from counterfeit and lost or stolen cards.

It is important to note that there is no mandate, legislation or regulatory requirement for card issuers or institutions to adopt EMV chip technology. This topic has gained attention in the U.S., due to an October 2015 liability shift deadline being imposed by the major payment brands (MasterCard, American Express, Discover and Visa). This deadline impacts both card issuers and merchants by transferring the risk of loss to the least secure party (deemed to be the non-EMV compliant party) in a point-of-sale (POS) transaction. At the physical POS, should the merchant terminal be EMV capable and the card not compliant, the liability falls to the card issuer (similar to what happens today). If the merchant does not leverage EMV-compatible point of sale devices, the liability could fall to the merchant. While the POS liability deadline is fast approaching, the liability deadline for automated teller machine (ATM) and automated fuel dispense (AFD) terminals occurs at a later date (see the liability shift timeline below for further details). 

The majority of issuers and POS operators in many global markets outside of the U.S., have transitioned to EMV technology. Globally, for the 12 months ended Dec. 31, 2014, 32 percent of all card transactions were EMV2. For the same time period, 80 percent of total card transactions were EMV-based in Africa and the Middle East; 85.41 percent in Canada, Latin America and the Caribbean; 27.01 percent in Asia; 96.6 percent in certain European countries (see footnote below for further information), and 0.12 percent in the U.S.2 Given the highly publicized card compromises that have occurred in recent years, both issuers and merchants likely are seeing an increase in the urgency to transition to EMV chip technology.

How Are Financial Institutions Dealing with EMV Technology?

With the looming liability shift deadline, many financial institutions already have positioned themselves to become chip card compatible or are working toward compatibility by October 2015. Several transition methods that we have become aware of include:

  • Natural re-issuance of existing cards at their expiration date awhile issuing newly opened, or lost or stolen cards with chip technology
  • A staggered re-issuance beginning with employees, then the rest of the card-holding population over a set period of time
  • Mass re-issuance of the entire card population at one time

What Are the Potential Benefits and Costs to Financial Institutions?

Besides the aforementioned liability shift, the EMV chip technology could benefit the institutions in the following ways:

  • Reduce fraudulent transactions
  • Increase brand reputation amongst customers
  • Avoid being a target due to delayed implementation
  • Global acceptance of the issuers’ card

Potential costs of EMV chip technology3:

  • Increase in per-card production costs
  • Implementation fees for networks, processes and card personalization bureaus
  • ATM device upgrades
  • Incremental per-transaction fees

Additionally, a cost that cannot easily be measured is the educational expense of both the issuer’s employees, as well as the issuer’s customer. Migration cost inevitably will vary by institution depending on the features of the card program.

What Are the Accounting Implications of the New Chip Card Technology?

The good news for most accounting departments within financial institutions is that EMV implementation does not change or implement any additional authoritative guidance or financial statement disclosure. The majority of all costs related to implementation and issuance of chip cards should be expensed as incurred. However, there may be some equipment purchases that can be capitalized under ASC 360, Property, Plant and Equipment, assuming that it provides some measureable future economic value.

Next Steps

Institutions that are in the process of EMV implementation should consider the following steps for a smooth transition:

  • Meet with your card processor and/or card sourcing provider to understand costs and the transition timeline. If you are considering a switch in processing providers, now might be an opportune time, as many offer signing bonuses that will help cover the cost of the transition.
  • Identify impacted customers and develop a notification campaign to make them aware of the change and how your institution plans to implement the technology. Consider not only customers who have cards issued by the institution, but also commercial customers that have POS systems. Are there services that your institution can provide to help them with the transition?
  • Provide notification and training to customer-facing employees, particularly call-center employees who likely will handle questions and issues with the new cards. 
  • Consider impact to third-party vendors (for example, outsourced call centers) and give adequate notification of the transition plan.



About the Author 

Ashley Ensley is a senior manager in the DHG Financial Services practice. Ashley has more than nine years’ experience and has served as the engagement senior manager on public and private financial institutions. She works primarily in the area of financial statement audits, internal control evaluation and Sarbanes-Oxley (SOX)/FDICIA compliance. 



About DHG Financial Services

DHG Financial Services, a national practice of Dixon Hughes Goodman, focuses on publicly traded and privately-held financial services companies across the U.S. Our 30 financial services partners and more than 300 dedicated professionals provide you with in-depth, specialized industry knowledge and a wide range of accounting, tax and advisory services to address issues facing your industry in today's challenging environment. DHG is a qualified security assessor (QSA), certified by the Payment Card Industry Security Standards Council, with certified professionals to perform payment card security attestation and advisory services. For more information, visit www.dhg.com/financial-services.  

 

1EMV is a registered trademark in the U.S. and other countries, and is an unregistered trademark in other countries, owned by EMVCo. http://www.emvco.com/about_emvco.aspx

2 EMVCo. (2014, December). Worldwide EMV Deployment Statistics. Retrieved from EMVCo.com: http://www.emvco.com/about_emvco.aspx?id=202

3Fiserv. (2014). Enabling the Path Forward with EMV. Retrieved from Fiserv.com: https://www.fiserv.com/emv/resource-center.aspx</sup3<>