Credit Card Processing Deadline Looms for Small Businesses

| August 4, 2015

cafe owner accepting credit cardSwiping a credit card—and potentially its information—will soon become more difficult. Come October  2015, there will be a shift in which party will be held liable for credit card fraud. After that date, merchants who have not upgraded their systems to so-called “chip and signature” technology will be on the hook for any credit or debit card fraud that occurs in their stores, transferring the risk to the business owner from the banks, which currently hold the liability

How EMV works—and why it’s safer

The technology, formally called EMV (for

Europay, MasterCard and Visa, the three companies that created the standard), requires businesses to purchase new terminals that make the old magnetic “swipe” strips obsolete. New debit and credit cards are embedded with chip technology that protects against fraud in two ways: First, the chip itself is more difficult to duplicate on a counterfeit card. Second, the chip assigns a unique code for every transaction made, so even if the code was acquired, it couldn’t be used to make another purchase. So while the data in a magnetic stripe can be “skimmed” or easily copied, chip information is much more complicated to harvest. 

According to Sushil da Silva, co-founder and CTO at Highline Software, the data breaches we’ve read about at large retailers entailed hackers penetrating the servers where the card numbers were stored, copying the numbers and creating new cards.

“Chip technology makes it very difficult and costly to clone a card because of the encryption and other factors,” he says. “The process is no longer as simple as buying a $50 device and writing a card number to it. The form of fraud that entails harvesting cards and cloning them will essentially go away.”

Existing technologycredit card machine

The technology is not new. The majority of the world has already moved to chips, and Europe has adopted an even more secure form of payment called “chip and pin,” which requires that consumers enter a four-digit pin number, rather than just a signature as the American standard will require.

According to the 2015 Payments Fraud & Control Survey conducted by the Association for Financial Professionals, 92 percent of finance professionals believe EMV cards will be effective in reducing point-of-sale (POS) fraud.

“Chip transactions offer more security for businesses of all sizes,” says Beth Kitchener, business leader of U.S. markets communications for MasterCard. “By adopting chip technology, customers will know that small businesses are serious about the security of their payments and will feel more confident while making transactions.”

Slow adoption by small businesses

Despite the looming deadline, recent surveys show that small businesses are way behind in converting their terminals.

One survey from 451 Research LLC found that more than 70 percent of small merchants will not be EMV compliant by Oct. 1, and a different survey of nearly 1,000 independent business owners by Newtek Business Services Inc. found that 71 percent of its respondents were unaware of the impending shift.

“Honestly, I expected greater awareness,” says Barry Sloane, president and CEO of Newtek Business Services, which provides financial and business solutions to independent businesses. “These owners are like a college student waiting until the last minute to cram for a test, and they are not considering this impending switch a crisis. Small business owners have a host of concerns, like their revenues and expenses, and worrying about their risk falls farther down their list. However, it’s not something they should take lightly.”

Malin & Goetz, a family-owned apothecary and lab based in New York City, impcafe owner lemented EMV technology at four of its stores in May, with two more coming online shortly. Founder Andrew Goetz says being an early adopter was the smart thing to do to protect the business.

Many small businesses may be reluctant to make the shift due to misconceptions about the cost. But according to Sloane, a bare bones EMV compliant terminal can run about $150. “We would have made the investment regardless of the cost because we’ll do anything to deter fraud, which is both frustrating and a waste of money to a business owner,” says Goetz.

As far as retrofitting their equipment, many small businesses may already have a terminal that is chip-enabled—some will only require payment processors to activate, MasterCard’s Kitchener says. Chip-enabled payment terminals have slots at their base for inserting the cards, but small business owners can ask their terminal manufacturers if they aren’t sure.

Seamless transition

As existing debit and credit cards expire or need replacing, banks have been sending the chip-enabled cards to consumers. Cardholders can also contact their banks if they’d like to receive their chip cards sooner.

Using them only requires a slightly different action by customers: Rather than swiping the card, they’ll insert it into a machine with a slot much like an ATM. Unlike magnetic strip cards, chip cards need to be left in the machine for a few seconds to be read, and the machine alerts customers when to remove it.

Goetz says the new chip technology is straight forward. “My customers might be savvier since many travel internationally, but I haven’t seen any resistance,” he says. “If you have the right partner, it is seamless to switch over.”

For its part, MasterCard says it announced its roadmap for the liability shift in January 2012, giving businesses ample time to make plans.

For small business retailers who are waiting until the last minute, time is running out.

 by Cathie Ericson, Bank of America

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Category: business management

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