Outdoor EMV Liability Shift: The Train Wreck We Will All See Coming

The problem is simple. The solution is not. 

1. In October 2020, convenience store retailers will be held responsible for the credit card fraud that takes place at fuel pumps that are not equipped to handle EMV transactions.
2. It can cost $100,000 to $250,000+ to upgrade all of the fuel pumps at a store to support EMV transactions.
3. Most independent c-store operators do not have the capital to invest in a capability that does not drive sales.

Most independent c-store operators have not upgraded and do not have active plans to upgrade their fuel dispensers to support EMV transactions.

As a I navigate the convenience store industry through various customer engagements, numerous conferences (national and regional), vendor collaborations, and participation in industry associations (NACS, CONNEXUS, SIGMA, etc.), the topic of Outdoor EMV feels like dirty laundry. Everyone consistently seems to appreciate the significance of the situation and even the urgency of VISA’s October 2020 Outdoor EMV liability shift. However, many also acknowledge that most of industry is not only not prepared; they are still not planning to take action.

The Problem of Outdoor EMV Compliance
In October 2020, Visa will shift the liability for fraudulent credit card transaction at the pump to convenience store operators who have not upgraded their pumps to accept EMV chip transactions. While some operators will be able to meet this requirement with an electronics upgrade kit, the challenge for most convenience store operators is that their pumps are so old that Outdoor EMV compliance will require replacing the entire pump. To make matters worse, installation of the pump can be as expensive as the pump itself.  Outdoor EMV compliance may cost many operators anywhere from $100,000 - $250,000+ per store.

The Operator’s Perspective
Some operators are hoping that Visa will extend the deadline. Others are hoping that the major oil brands will offer some kind of promotion to help cover the cost of becoming EMV compliant. Some operators don’t believe that the major oil brands will pass on the liability for the chargebacks. The thinking is that, “If the major oils do not charge the convenience store operators the chargebacks today, why would they do it after the liability shift?” Still, others are waiting to see how expensive the fraudulent charges are. They are hoping that the cost will be bearable.

The Reality of Outdoor EMV Liability Shift
Convenience store operators should carefully consider the consequences of not supporting EMV transaction at the pump. While it is true that Visa extended the deadline from 2017 to 2020, it was done with the specific purpose to provide the vendors with additional time to bring the required hardware and software products to market. The suppliers have made significant progress since the earlier 2017 deadline. Visa is not likely to provide another extension and is quite motivated to keep the October 2020 deadline. Throughout the world, EMV has repeatedly proven its effectiveness in reducing credit card fraud. So much so that where EMV has been implemented, the fraudulent activity consistently shifts to those countries and businesses that have not adopted EMV enabled credit card transactions.  This trend suggests that outdoor EMV fraud will disproportionately shift to those operators who have not upgraded their pumps.

Hoping that someone else will pay for the Outdoor EMV upgrade is not a reasonable business strategy. Consider the sheer magnitude of dollars involved. ~150,000 convenience stores in US x ~$150,000/store = $22.5B! 

Similarly, hoping that someone else will pay for the chargebacks is also not reasonable. Credit card fraud is on the rise. For a relevant example, commercial fleet cards are particularly vulnerable as many commercial cards do not support EMV chips. Where commercial companies were once willing to absorb a thousand or so dollars of chargebacks, many are unwilling to absorb chargebacks more than $10,000. Some operators are now struggling under a punctuated transition of no experience with fraud to being held responsible for an overwhelming chargeback surprise. One could say that the credit card companies have not done the operators a favor by absorbing the past smaller amounts of fraud, because it has left them unprepared.

Today, many convenience store operators don’t see the chargebacks because the burden of the credit card fraud has been borne by some combination of the major oil companies and the various credit card companies who share in the very profitable business of credit card transaction fees. For lower levels of chargebacks, it made business sense not to pass the liability on to the retailer. Otherwise, the convenience store operator would be motivated to switch to a competing brand who didn’t pass on the chargeback. However, as the levels of chargebacks substantially increases, the business model and the market is changing.

The whole premise of the Outdoor EMV liability shift is that responsibility for the credit card fraud will rest with the entity who has exposed the system to the fraud.  When a convenience store operator fails to upgrade their pumps with the capability to support EMV transaction, the operator will be clearly at fault for the fraud.

The EMV Divide
The lack of Outdoor EMV compliances does not appear to be evenly distributed throughout the industry. Larger multi-unit operators appear to be taking Outdoor EMV compliance seriously and are making the necessary investments, whereas the smaller operators, particularly the single site and smaller dealers are waiting to see what will happen when the deadline comes.  

When the Outdoor EMV deadline comes, it will create an industry-wide divide between the larger and smaller operators. Criminals favor the path of least resistance. The fraud that was previously taking place at the larger operators will shift to the smaller operators. Those who fail to comply with the Outdoor EMV requirements will not only be held liable for their current levels of fraud; they will be held liable for the increased levels of fraud as the criminals shift their focus from the larger Outdoor EMV compliant operators to the smaller non-compliant operators.

Predictions for the Futures
The October 2020 deadline will catch most of the convenience store industry unprepared. Smaller operators who previously may previously have had less than a few thousands of dollars of credit card fraud will see chargebacks steadily increase to $5,000 to $10,000+ per month. Having to pay such significant chargebacks will finally persuade the smaller brand operators to order the Outdoor EMV upgrade. However, since the smaller operators as a group will be experiencing these chargebacks shortly after the liability shift, they are also likely to be ordering the outdoor EMV upgrade around the same time. The resulting enormous wave of outdoor EMV upgrade orders will not only overwhelm the availability of hardware, it will also overwhelm the limited pool of service technicians available to do the installation work.

As a result, smaller operators who put in orders for outdoor EMV upgrades may have to wait 6-12+ months for the work to be done. Some estimates suggest that with current market resources it may take seven years to upgrade the entire convenience store industry to outdoor EMV. During this time, these operators will have to pay a growing monthly chargeback fee. The longer the upgrade takes, the larger the monthly chargeback fee will grow as criminals will have an increasing focus on a decreasing population of stores to attack.

Many operators will not be able to endure the increasing monthly chargebacks. They will have no choice but to stop accepting outdoor credit cards. Customers will have to either go inside the store to pay for gas or they will have to use a mobile payment app. An interesting side effect of the Outdoor EMV liability shift may be to drive both convenience store operators and consumers to adopt mobile payment solutions. Such an approach may be significantly cheaper and provide a superior customer experience than the outdoor EMV upgrade.

In the end, it will be a question of cash flow. When the outflow of the chargebacks exceed the profitability tolerances, store operators will have to sell their stores. A substantial portion of the independent convenience store market will have no choice but to exit. This will not only have a devastating impact on the convenience store operators but also on all the other members of the supply chain (e.g., dealers, fuel marketers, major oils, etc.)

Suggested recommendations
While the immediate future is quite challenge for convenience store operators, there are several steps they can take to prepare.

• Understand the current levels of chargeback exposure. Even if an operator is currently not paying for the fraudulent chargebacks, operators should proactively find out how much fraud they could have been held responsible for and the trend of how that number has been increasing. This figure is a starting point for understanding their potential risk after the Outdoor EMV liability shift occurs.    
• Assess the current cash flow. Operators must understand precisely at what point do the chargebacks exceed their ability to operate their business. It is always much easier to make high-quality decision in advance of the storm, rather than reacting to the chaos and pain of being in the storm.
• Understand the options for an Outdoor EMV upgrades. Operators should work with their suppliers to fully develop a plan to upgrade their stores to outdoor EMV. Even if they will not invest in Outdoor EMV upgrade, operators should at least have a plan to execute. When the chargebacks levels become unacceptable, having an existing plan will accelerate their ability to execute the outdoor EMV upgrade.
• Engage early with the Major Oils. The sooner operators ask the major oils for help, the more options there will be available.  The majors are already actively engaged and are an ideal resource for guidance and support.
• Develop an exit strategy. The Outdoor EMV Liability shift may mark the end of many convenience store businesses. If an operator cannot execute the outdoor EMV upgrade, it will be to their advantage to exit earlier. As with the competition for EMV outdoor hardware and technicians increases, the longer an operator waits, the more competition they will have to endure with other operators seeking to do the same thing.

Conclusion
The October 2020 Outdoor EMV liability shift will dramatically re-shape the convenience store industry. The problem is that there aren’t enough resources (e.g., financial, equipment, services, and buyers) to meet the needs of the entire industry. Those who take action earlier will have greater opportunity to make the most of a difficult situation. Those who wait will find themselves fighting for a very limited pool of leftover resources.