As October 2017 is here, with regard to what many are calling the VISA EMV Liability Shift (why, I’m not sure as I thought all of the other Networks in addition to VISA were now following the path that MasterCard & Shazam took last October 2016), I have continued to read numerous articles, publications, and blogs that the vast majority of merchant owned ATMs, approximately 200,000, are still not EMV Compliant.
Well there are lots of reasons, countless opinions, explanations, theories, and rationalizations as to WHY that is the case. However, I recently noted in reading another publication that the vast majority of gas stations have yet to switch their fuel pumps to be EMV compliant. One could see a connection between these 200K merchant owned ATMs and the fuel pumps that have yet to be upgraded to be EMV compliant, as to WHY some of these ATMs have not been upgraded as well.
The article stated that as of 2013 there were just under 153,000 gas stations in the US, of which convenience stores purchase around 80% of automobile fuels. The vast majority of these stores were/are owned by merchants, not major oil companies. Exactly how many of these gas stations as of October 2016 – October 2017 are independently owned (merchant), I do not know exactly, but my assumption is probably far in excess of 100,000.
So WHY am I citing these numbers? Because, over the past year the vast majority of these independently owned/merchant gas stations have barely moved toward upgrading there fuel pumps to be EMV compliant for a whole host of reasons. WHY is that you ask? Well, according to the article I read:
- Fraud at fuel pumps are very low…“1.3% of total U.S. payment fraud.”
- Most gas stations have multiple pumps at their site, with each upgrade per pump ranging to cost from $6K to $10K.
The cost is compounded if pumps have to be physically removed, not only with respect to hardware but also to replace wiring as well, due to loss of business while all this physical remodeling goes on.
- So, the independently owned/merchant gas stations have weighed and are continuing to weigh their overall expense to upgrade against the risk of not upgrading and incurring EMV non-compliant fraud…plus they now have three more years before their EMV deadline.
- Consequently, it appears this has become a business/financial issue and the independently owned/merchant gas stations have voted to wait and see by their non-action to upgrade.
WHY is that relevant? I will now go out on a limb here and assume that most of these 100,000 plus independently owned/merchant gas stations have an ATM on site within their convenience store. So, it should not be a surprise that a high percentage of those independently owned/merchant gas stations not currently upgrading their pumps to be EMV compliant have likewise decided to hold off upgrading their inside store ATMs to be EMV compliant as well, even though:
- the cost to upgrade one in-store ATM (if doable) or replace it would probably be less than the cost to replace or upgrade a fuel pump
- no real downtime to upgrade or replace an ATM,
- ATM fraud will be higher than at a pump, and
- the ATM deadline is not three years away, but next month!
If I am correct, then probably a significant percentage of the 200K merchant owned ATMs that currently are not EMV compliant sit in convenience gas station stores.
So, if you are an IAD/ISO that have Merchant Owned Processing Agreements currently in force with some of the 200K independently owned/merchant gas stations (with respect to their in-store ATM) and/or other types of merchants that have not upgraded to be ATM EMV compliant, the $64,000 chargeback question is WHAT are you going to do?
I have written white papers, blogs, been a panelist on webinars, spoke at ATM conferences, all with the same message concerning this issue. Continually educate merchants and document your file with regard to your contacts with merchants that
- have this type of ATM Processing Agreement that
- the merchants are liable for chargebacks and
in order to avoid liability, merchants need to upgrade their ATM to be EMV compliant However, if merchants are in avoidance mode and elect not to upgrade their ATMs, IADs/ISOs need to upgrade these Merchant Owned Processing Agreements to protect themselves.
WHY? Because, if an IAD/ISO has not amended their Merchant Owned Processing Agreement over the past year or two to deal directly with EMV liability shift claims, the IAD/ISO risks being hit with EMV chargeback claims. If IADs/ISOs have not done so, typically, IADs/ISOs are not protected by their standard contract terms with the merchant against EMV liability shift chargebacks when chargebacks start to occur.
WHY? The EMV liability shift is neither U.S./state government regulated and/or required, nor network mandated. Thus, merchants are neither legally required nor mandated to upgrade. Consequently, what provision is an IAD/ISO going to rely on in their standard Merchant Owned Processing Agreements for protection with merchants to deal directly with EMV liability shift claims? Typically, most such agreements have no such provision!
I do understand completely that the chargeback is the merchant’s liability (when the merchant owns the ATM), although the merchant will argue it is not in breach of its contract (in most cases) with the IAD/ISO for not upgrading…irrelevant. Nevertheless, based on the contractual relationships between the applicable parties, the IAD/ISO will be the one that initially incurs the financial liability of a chargeback.
WHY? The IAD/ISO has the contract with the processor & sponsoring bank. The processor, pursuant to instructions from the IAD’s/ISO’s sponsoring bank, will withhold money out of the IAD’s/ISO’s settling account (which indiscriminately will apply to all the IAD’s/ISO’s merchants’ ATMs’ surcharge fees being settled, not just the merchant with the EMV non-compliant ATM) to cover the chargeback. More than likely the IAD/ISO will have to file a lawsuit against the merchant to recover those funds. And, litigation is the last thing most IADs/ISOs I have talked to want to initiate, and rightfully so…not good for good customer relations. Unfortunately, I hope IADs/ISOs have other cash flow streams besides their settlement accounts while they try to recover the chargeback funds being withheld. And, I certainly hope the IADs/ISOs do not have additional merchant owned, non-upgraded ATM chargebacks, as more funds ultimately will be withheld from settling accounts if there are.
In conclusion, hopefully IADs/ISOs can be creative to come up with a financial incentive for merchants to upgrade their ATMs. If that fails, try to negotiate and sign an amended processing agreement with teeth regarding chargebacks. And if that fails, an IAD/ISO might want to consider negotiating a walk-away. My concern is that an IAD/ISO who does nothing (and has old contracts with the type of merchants discussed above), will have the doom & gloom question hanging over their business of not if but when are they going to be hit with a wave of chargeback claims.