Examining the Costs of Chip Liability

It’s been over a year since the U.S. EMV liability shift of October 2015 and the chip rollout has been challenging, to say the least. In this post-liability shift climate, hotel owners and managers are incurring costs at every turn; whether it’s the cost associated with implementation or the even greater losses experienced by those lagging in implementation.

The IHL Group estimates that retailers will spend at least $35 billion on EMV implementation. Both large hotel chains and boutique operations prepared for the implementation costs: only 11 percent of travel and lodging retailers planned to decrease investments in payments in 2016.

Yet, the most recent estimates of EMV adoption in the U.S. are falling short of expectations. At the end of September, global payments consulting firm The Strawhecker Group (TSG) released survey results estimating that just 29 percent of U.S. card-accepting merchants with EMV terminals are actually able to accept chip-based transactions.

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87 Percent of Cards Presented to Travel Businesses are Chip Cards

Hotels that cannot accept chip cards at their terminals are highly vulnerable to EMV-related chargebacks. The CardFlight EMV Migration Tracker – October 2016 analyzed hundreds of thousands of transactions processed through the CardFlight payment gateway since the liability shift and found that 87 percent of payment cards provided to travel businesses contained EMV chips.

The prevalence of consumer use of chip cards in the travel space might be the result of American Express proliferation in business travel. CardFlight also reported that among American Express cards processed via their payment gateway, 96 percent contained EMV chips. Remember, the hotel is liable for every potentially fraudulent chip card processed with an out-of-date, EMV-unready terminal.

Unique EMV Implementation Hurdles for Hotels

Julie Conroy, research director and fraud expert at Aite Group, detailed the challenges hotels face specifically after releasing the group’s EMV and NFC: U.S. Merchant Implementation Status 2016 report. “We’ve also seen hospitality slower to upgrade to EMV,” Conroy said. She went on to say that it’s likely that hospitality is “thinking that they are not prime targets for counterfeit fraud.”

The implementation hurdles hotels face that other retailers do not is twofold. First, payment terminals at hotels aren’t representative of the traditional terminals found at retail and restaurant establishments. Charges need to be tracked throughout the guest experience: from check-in to checkout and post-checkout adjustments.

Second, EMV dramatically changes the way payments are collected. Hotels now need to have terminals installed that the guest can access to dip their card. Employees from the front desk to the restaurant must be trained on new procedures and be ready to assist guests with these new processes as well.

EMV-Related Chargebacks

Thanks to the liability shift, hotels that aren’t properly EMV compliance face increases in chargebacks. In the TSG survey, it was also found that more than 60 percent of respondents experienced an increase in the number of chargebacks their business experienced. Similarly, the Aite Group’s survey found a 25 percent increase in EMV-related chargebacks in the first half of 2016. As seen in other countries that have implemented EMV, counterfeit fraud rates will continue to rise until the volume of chip card users and working chip card readers reaches a large enough volume.

Bear in mind that these chargebacks are not new instances of fraud. Until the liability shift, issuers simply absorbed these losses and the merchant would be none the wiser. Now, hotels are seeing these fraud-related chargebacks appear under newly created reason codes by the card networks. The new reason codes that merchants are seeing post liability shift include: Visa Reason Code 62, MasterCard Reason Code 4870, and MasterCard Reason Code 4871.

Fortunately, the major card networks have made moves to lessen the impact felt by merchants who are lagging in terminalization through no fault of their own. Both Visa and American Express policy adjustments remain in effect until April 2018, block all chargebacks under $25, and limit the number of counterfeit fraud-related chargebacks to 10 per card account.

Fraudsters Capitalize on Hotel Vulnerabilities

The hospitality industry is already an enticing fraud target, due to the very nature of hotel payments and operations. A wealth of customer data is stored for the duration of their stay creates multiple exposure points for unencrypted personal account information.

Hotels without upgraded payment terminals to accept chip cards put themselves at risk for fraud losses on top of those associated with the liability shift. All merchants, regardless of industry, that do not have operational EMV terminals leave themselves vulnerable to hackers and organized crime rings who are now zeroing in on magnetic stripe environments.

The bottom line is that the sooner hotels make the switch to EMV terminals, the better. As long as chip accepting payment terminals are not present, hotels are vulnerable to fraud and increased chargebacks.