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From: Glenn Petersen3/23/2016 3:28:01 PM
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Chip-Card Payment System Delays Frustrate Retailers

New York Times
MARCH 22, 2016

Avi Kaner, co-owner of Morton Williams supermarkets in New York, with a stack of chargebacks from credit and debit card companies that he says he is required to pay even though the chain spent $700,000 to update terminals to accept embedded digital chip cards. Credit Danny Ghitis for The New York Times

Avi Kaner, a co-owner of the Morton Williams supermarket chain in New York, has spent about $700,000 to update the payment terminals at his stores.

Trouble is, he cannot turn them on.

The new terminals can accept credit and debit cards with embedded digital chips, a security feature intended to reduce the number of fraudulent purchases.

But before the payment systems can work, they must be certified, a process that Mr. Kaner and many retailers around the country are waiting to happen. In the case of Morton Williams, the holdup has lasted several months.

The cost of waiting, retailers say, is piling up. Until recently, banks covered much of the cost of fraudulent purchases. Since Oct. 1, though, merchants that cannot accept chip cards have had to shoulder the cost of fraud, and banks have not been shy about passing along the bill.

“It’s been very frustrating,” Mr. Kaner said in an interview last week at his office in the Bronx, the home of his family-owned business. He bought most of the equipment he needed before Oct. 1, he said, and has been waiting months to get it certified. The delay, he said, pointing to a tall pile of paperwork, has cost him thousands of dollars in payments for fraudulent purchases.

“There’s no recourse,” Mr. Kaner said.

The long delays are just the latest black eye for the deployment of the new systems. Some consumers have not yet received new cards. Many merchants have not bought the updated equipment. And even when the cards and the terminals have been updated, they have generated confusion and slow lines.

Many of the complications were widely predicted, but the certification system has added an unexpected wrinkle — and lots of finger-pointing.

Banks say that retailers waited till the last minute to update their terminals. Retailers point to financial ties between the banks and the companies that provide certification, saying there is no motivation to move faster.

“I think there are merchants who should have been prepared and aren’t,” said Thad Peterson, a senior analyst with the research firm Aite Group. “I think there are merchants who thought they were prepared but aren’t.”

For years, retailers have argued that the technology, commonly referred to as E.M.V., which stands for Europay, MasterCard and Visa, the technology’s early advocates, mainly protected banks. Mr. Peterson estimated that only 40 to 50 percent of retailers are capable of accepting chip cards.

A credit card with an E.M.V. chip being scanned at a Walmart Supercenter in North Bergen, N.J. Credit Bryan Anselm for The New York Times

Each part of a transaction must be certified, including the payment hardware and each payment network, like Visa or MasterCard, that merchants accept. To get certified, businesses work with payment processors like First Data and Vantiv.

The whole process, even when it goes smoothly, can take weeks or months.

It is hard to say exactly how many retailers are affected by the delays. First Data, one of the country’s largest payment processors, said that about 20 percent of the four million American merchants it works with are in the process of being certified.

Complaints have been widespread among midsize businesses — not as small as a mom-and-pop corner store but smaller than a big-box chain.

Midsize merchants have more specialized needs than a store with a single location, for example, as a bigger business often needs payment software tailored to specific loyalty programs, inventory or other systems. Those tailored systems can complicate the approval process.

That’s something Mr. Kaner has learned the hard way.

“They’ve delayed month after month of providing certification,” Mr. Kaner said of Vantiv. “I asked to speak to their legal department, and their legal department basically told me tough luck.”

Mr. Kaner said it was difficult to know exactly what was holding up the process, because Vantiv must also work with a merchant’s software vendors and payment hardware manufacturers.

In a statement, Vantiv said that “the conversion to E.M.V. is highly dependent on the business priorities and timelines of the many other parties involved in the complex integration process, as was the case in this instance.”

Retailers have also pointed to the financial ties between banks and processors, raising questions about whether the companies are inclined to work slowly.

Fifth Third Bank owns about 18 percent of Vantiv, for example. Some of the largest card issuers, like JPMorgan Chase, even have their own payment processing units. Bank of America’s processing arm, Bank of America Merchant Services, is a joint venture between the bank and First Data.

Payment processors “don’t have any incentive to hurry the certification along,” said Patrick J. Coughlin, a lawyer for retailers in a recent lawsuit that accuses the major card networks of deliberately creating impossible requirements for merchants. “They’re not the ones paying the fraud charges.”

Visa and MasterCard said they were reviewing the lawsuit. American Express said that it believed the charges lacked merit and that it planned to “defend the case vigorously.”

Cedit card chargebacks. Since Oct. 1, merchants that cannot accept chip cards have had to shoulder the cost of fraud. Credit Danny Ghitis for The New York Times

MasterCard’s president of North America, Craig Vosburg, said that the company continued to “work with parties across the industry” to help the transition.

Trish Wexler, a spokeswoman for JPMorgan Chase, said, “If it’s our fault that our merchant is delayed in getting a compliant terminal, then we absorb chargebacks for card-present fraud during that time period.” A spokesman for Bank of America Merchant Services declined to comment.

Jason Oxman, chief executive of the Electronic Transactions Association, a trade group representing the payments industry, dismissed the idea that processors might benefit from delaying certification.

He said he had not heard of widespread certification delays, and added that merchants were given plenty of time to prepare for the shift to E.M.V. The transition has been in the works for several years, and some of the new payment terminals have long been widely available.

Some merchants also deliberately waited until after Oct. 1 to begin updating their equipment, arguing that the deadline was just before the busy holiday shopping season.

Now, they may just be paying the price.

“Merchants are starting to see counterfeit liability appear on their statements that they’ve never seen before,” Mr. Oxman said. “And I do think that may be creating some frustration.”

But Mallory Duncan, general counsel at the National Retail Federation, a trade group, said that the payments industry was unprepared to handle the flood of requests that came in around the Oct. 1 deadline.

“They didn’t allow for enough time or people to perform this certification,” Mr. Duncan said. “Merchants have gotten slammed because they weren’t able to get certified, because the networks failed to provide the necessary resources to do that.”

Mr. Kaner, of Morton Williams, said that since Oct. 1, customers who have contested charges made with E.M.V.-enabled cards have succeeded in getting many transactions reversed — at Morton Williams’s expense.

Mr. Kaner worries that some customers may be using the Oct. 1 liability shift to get out of paying for legitimate purchases. The number of chargebacks, he said, has risen sharply.

“It started out as a trickle, and now it’s turning into a flood,” he said. “In the first couple months, it might have been a few hundred dollars a month. Now, it’s thousands a month.”
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