October 1, 2015, is the date that many payment networks, including Visa, American Express, Discover, and MasterCard, have set for a counterfeit fraud liability shift. Although that date is just around the corner, many small businesses are unaware of the shift.1
The liability shift is directly tied to the rollout of EMV chip technology in the United States. Currently, credit cards have a magnetic strip encoded with basic information that the terminal captures when the card is swiped. The information is passed on for authentication and authorization.2
EMV changes the process. EMV relies on a secure chip memory and an intelligent processor to enable different card authentication and cardholder verification methods.3 As Visa explains, its EMV chip cards "protect in-store payments by generating a unique, one-time code needed for the transaction to be approved." 4
On October 1, 2015, as between the issuing financial institution and the merchant, in-store counterfeit fraud liability will shift to the party that has not adopted EMV technology.5 Three scenarios help explain the shift:
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Magnetic-stripe card at magnetic stripe terminal. If a traditional magnetic stripe card is swiped by a customer at a magnetic stripe terminal, liability for the counterfeit transaction will remain, like today, with the issuing financial institution. That is because neither party has adopted the EMV technology.6
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Chip card at magnetic stripe terminal. If a chip card is used at a traditional magnetic stripe terminal, the merchant will generally be liable for a fraudulent transaction because the issuing bank has provided EMV technology, but the merchant has not.7
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Chip card at chip-enabled terminal. If a chip card is used at a chip-enabled terminal that has been activated by the merchant, the merchant will not be liable and liability will remain with the issuing bank.8
There are notable exceptions to the new liability shifting rule. Liability for automated fuel dispensers and ATM transactions shifts at a later date, and the liability shift does not apply to card-not-present transactions.9
If your business accepts credit card payments through card present transactions—meaning your customer is physically present and swipes a credit card to make payment—act now to implement EMV technology in advance of the liability shift.
1 Amrita Jayakumar, A Big Legal Burden Awaits Small Businesses, and Most Aren't Aware of It, WASH. POST (July 24, 2015).
2 Phillip Miller, Guy Berg, Jeff Stroud & Steven Paese, EMV for U.S. Acquirers: Seven Guiding Principles for EMV Readiness, MASTERCARD ADVISORS (July 2012).
3 Id. at 4.
4 EMV LIABILITY SHIFT – Why it pays to adopt new technology, VISA, (last visited Aug. 17, 2015).
5 Id.
6 Id.
7 Id.
8 Id.
9 Id.
