The Great Credit Card Liability Switch

In an effort to reduce fraud, new credit cards are being introduced around the world which have computer chips embedded in them. These are called “smart cards” or “chip cards” or “EMV cards,” which stands for Europay, MasterCard and Visa. The cards were introduced in Europe, Asia and Africa years ago. The U.S. is the last major market to adopt them. While we have about 24% of all credit cards worldwide, we account for about half of all credit card fraud.

It is estimated that in the United States there are 1.2 billion payment cards. About half are expected to be replaced by the end of 2015. The new cards require new point-of-sale card readers. One estimate is that there are 8 million of those in the U.S. They are being rolled out but completing the transition is expected to take years, as it has in other countries.

Even so, there is an important deadline of October 1, 2015. The deadline includes a “liability switch” taking effect that day. Currently, the credit card issuer or payment processor usually bears the cost of credit card fraud. As of October 1, if credit card fraud occurs, the least EMV-compliant party in the transaction will be the one legally held liable to bear the loss.

So, if the consumer uses a smart card, but the merchant is still using the old reader, then the merchant will bear the loss of the fraud.

If the consumer uses an old card, and the merchant has a new reader, the credit card issuer or payment processor will bear the loss.

If consumer and merchant both have old gear, the merchant will bear the loss.

One major carve-out exists for gas stations. They have until 2017 to transition to EMV-readers in their automated gas pumps. For them, the liability rules remain as is until then.

Obviously, merchants should upgrade their equipment as soon as possible. One interesting development comes from Square, the little card reader merchants can plug in to an iPad or mobile phone. Square is advertising “We cover fraudulent swiped chip card transactions from the moment you order your new reader until it arrives in the mail.”

Consumers need to be aware that the new cards work a bit differently than the old ones. Quick swiping is going away. With a chip card, the reader holds onto the card until the transaction is complete. Consultants are warning that consumers may forget to grab their cards before leaving the store.

For further information about liability for credit card fraud, contact experienced business attorneys.

Gary Schuster is Senior Counsel with the firm and practices Business Law. He can be reached by phone at 866-303-9595 toll free or 845-764-9656 and by email.