Many US retailers not ready for fraud-proof cards

Sofia Goode, Special to CNBC
Credit cards with EMV chips.
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By the fall, millions of Americans will have gotten new high-tech credit and debit cards, part of a broad effort across the financial industry to reduce fraud.

But many U.S. small businesses are unprepared for the changeover, which could leave them on the hook for any fraudulent transactions that occur after the shift happens.

The new credit cards are called EMV (Europay, Mastercard and Visa), and include a microchip intended to lower fraud.

While the new credit cards will still contain the current standard magnetic strip to allow for backward compatibility, they are designed to be read through their more secure microprocessor chip that creates unique data with every transaction.

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This dynamic element makes EMV cards almost impossible to counterfeit; The United Kingdom saw a 32.5 percent reduction from 2004 to 2011 after the introduction of chip-based cards.

Credit card companies in the United States are pushing businesses to follow suit, and start accepting the microchips through a liability shift on Oct. 1, when American Express, Discover, Maestro, Mastercard and Visa will relinquish their liability for EMV card-present fraud to any businesses not accepting EMV.

While bigger retailers like Target and Wal-Mart have already made the adjustment, and are now accepting microchip cards, the transition has been more difficult for many small businesses. According to a recent Intuit study, only 42 percent of small businesses in the United States have committed to accepting EMV credit cards. Those that don't will soon take over financial and legal liability for fraudulent activity in their transactions.

The liability change was designed to give businesses time to conduct research and make smart decisions about upgrading their technology.

"Liability shifts have been used very effectively around the world and what they do is instead of a hard mandate that would require all businesses—both issuing banks and merchants—to transition quickly at the same time, it allows each business to make their own decision about the investment to migrate as well as any resulting costs and liabilities," said Carolyn Balfany, senior vice president of product delivery–EMV, MasterCard.

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More than half of the small businesses who do not intend to switch cited the cost of a new point-of-sale terminal as their primary barrier, while around a quarter said that the time necessary to research the tech and educate their employees was stopping them from moving forward.

However, according to Intuit, 85 percent of those small businesses said that they didn't know about the liabilities they'll be taking on, and 86 percent said that they might not be able to handle them.

Sally Cook, owner of Heirloom Bakery in South Pasadena, California, said she hadn't known about the liabilities her business will be taking on in October. Cook switched her business over to a new EMV-capable system called Clover a few months ago because it saved money on credit card processing, and learned about chip cards in the process.

"When they came and pitched the product, they informed me that there were some changes that needed to take place and they were already in place on the Clover system," Cook said. "I do know that there was a shift in terms of how certain things would be processed that we would need to comply with, I think, by the end of this year. At that point we would have to have everything in place, and that was another reason we were happy to switch over."

However, even with smart-chip capabilities, Heirloom has been processing EMV cards using their magnetic stripe.

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"We just slide all of them the same way," Cook said. "We haven't been given any other information from Clover in terms of how to process them."

The new processing system made accepting credit cards cheaper for Cook, and for businesses already using mobile readers, the switch requires ordering an updated version from their provider at a cost of around $30. More traditional small point-of-sale systems can be found online for between $150 and $450, but those with more complicated systems could have higher research and technology costs.

However, the cost of a new point-of-sale system is far from the biggest expense a business could face if it does not have an EMV terminal and accepts a fraudulent credit card. Sixty-three percent of all the small businesses surveyed claimed some level of credit card fraud on an annual basis, with an average of 7 percent of transactions being fraudulent.

Those transactions add up; in 2012, the United States saw $5.2 billion in credit fraud loss, 47.3 percent of the world's total. For smaller companies, the losses incurred could be enough to push them out of business.

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A recent survey from MasterCard says that American consumers are ready for the shift to EMV. In fact, 77 percent of them are concerned about their financial information being stolen or compromised. Balfany stated that accepting EMV cards might help businesses reassure their customers.

"Consumers actually expect merchants to upgrade and what consumers tell us is that they see a merchant that upgrades more positively because they see them as being willing to invest in their security," Balfany said.

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