Making the Cost of Chip Cards Fit the Crime

NEW YORK (TheStreet) -- Visa (V) and MasterCard (MA) are pounding the table on the "liability shift" scheduled for October 2015. That's when responsibility for losses on credit card transactions moves, or shifts, from card holders to merchants.

Right now cardholder banks mostly eat these losses, which are estimated at a whopping $5 billion per year. After October 2015 this will start to shift to merchants' banks, and thus to merchants.

If a customer offers a chip-embedded card (as opposed to the current cards with a magnetic stripe on the back) after that date and the merchant doesn't use a chip reader, the merchant could be liable for any fraud that results. The money would come out in the "discount" processors charge for their service, currently about 2.25%. 

Sounds terrible, until you realize U.S. bank card transactions total $4.4 trillion per year.  That makes $5 billion a rounding error.

Chip cards cut the most common fraud -- counterfeit cards created with data stolen from merchants, as in the Target (TGT) breach last Christmas.  European merchants, who process transactions in batches and adopted chip cards years ago, see very little fraud from counterfeit cards.

If all merchants adopt both chip cards and the use of PIN numbers (rather than signatures) in transactions, it would reduce losses from lost and stolen cards. But this is the least-common type of loss.

The fastest-growing form of card fraud, the use of stolen account numbers in online transactions, is not addressed by chip cards, even with a PIN. Small merchants without online stores wonder, why worry?

There are three main components in any card transaction. Acquirers, who work on behalf of merchants, running the transaction and moving the money, are ready for the shift, said Ellen Richey, chief enterprise risk officer at Visa.

Issuing banks, the banks that hand out credit and debit cards, will start shipping chip cards over the next year as cards expire. They will mostly be ready for the liability shift.

The problem is with retailers, most of whom have yet to buy the new terminals and electronic cash registers required to handle chip cards, also known as EMV cards because Europay, MasterCard and Visa cooperated on the specifications.

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