Local banks are spending hundreds of millions of rand to prepare for migration to the Europay, MasterCard and Visa (EMV) global standard for smart credit cards that will replace magnetic stripe cards.
Europay, MasterCard and Visa are spearheading the new international card specification as a means of overcoming the challenges - such as rampant fraud - that the international credit card industry faces. The EMV smart card is a plastic card with an embedded microchip that offers more flexibility and functionality than magnetic stripe cards.
The EMV standards lay down specifications for smart credit cards, terminals such as ATMs and point-of-sale devices, and back-office processes to ensure credit card payment systems used by card issuers and acquirers are compatible.
Most of SA's major financial services institutions are well advanced in their move to EMV. They have a good reason to meet the 2005 deadline for EMV compliance: liability for fraudulent transactions will shift from credit card organisations to the bank credit card issuers, acquirers and merchants that are not ready to issue or accept EMV cards.
The big banks are preparing themselves to issue the more expensive chip-based cards to customers when their credit cards expire, as well as to upgrade their point-of-sale and ATM networks to accept the new cards.
Banks are also upgrading authorisation and cryptography software, acquiring EMV card-issuing systems and aligning their payment authorisation processes with EMV rules, says Gerhard Claassen, MD of the Crypto & OEM business unit at JSE-listed smart card developer Prism.
First National Bank (FNB) merchant acquiring director Kestell Laurie says the division kicked off its EMV project in May 2002 and expects to comfortably meet the 2005 deadline for the EMV back-office and point-of-sale infrastructure. Indeed, FNB's merchant network is already processing transactions from European and British visitors who have been issued with EMV cards.
The project is expected to cost between R100m and R120m, once the cost of upgrading point-of-sale equipment that is reaching the end of its lifecycle is factored in, says Laurie. "EMV is as much of a profound technology shift as the move from paper-based systems to magnetic stripe cards. It's a complex project, but we have made it our priority," he says.
Standard Bank is piloting its smart credit cards through limited implementation to its staff, and all big banks will participate in a pilot project with retailers at the Canal Walk shopping centre in Cape Town to verify the EMV-compliance and interoperability of their payment systems.
These pilot projects should ensure a smooth migration to EMV in SA and will highlight the challenges that need to be addressed in the implementation , says MasterCard Southern Africa technology vice-president Gary Byrne.
The biggest adjustment cardholders will have to make is they will have to get used to keying in a personal identity number (PIN) to verify a transaction rather than signing a credit card slip, he says. The first EMV cards will include a magnetic stripe in addition to the microchip, to ensure cardholders can still conclude a transaction at a point of sale that has not been upgraded to EMV standards.
Merchants and banks alike expect the benefits of EMV to justify the costs of implementing the technology.
The chip on an EMV card will store a PIN that the cardholder will punch in at the point of sale to conclude a transaction, making it more difficult for thieves to use stolen credit cards. The EMV standard includes improved safeguards for e-commerce transactions.
The new standard will also help to prevent "skimming", a form of credit card fraud where data from a card's magnetic stripe is electronically copied onto another card, says Byrne. Though this trick has yet to catch on in SA, it accounts for fraudulent transactions of about £160m/year in the UK.
The benefits of the new card standard, however, should go far beyond reducing the exposure of banks, merchants and consumers to fraud.
The chip on the EMV card can store more information than the magnetic stripe, creating opportunities for banks to load data such as loyalty-programme information onto their credit cards. Another benefit is that the information stored on the smart cards will enable merchants to process transactions offline, which will save them money.
Says Byrne: "We expect EMV cards to provide banks with a means of differentiating their credit card offerings on the basis of value-added applications."
