Ethics of Default Rules: EMV Chip Card Readers and (or versus) Merchants

U.S. consumers are in the midst of a transition from swipe-and-signature transactions to chip-reader (EMV) transactions for using debit and credit cards to pay for purchases. It is both fascinating and frustrating because (1) some merchants have acquired the new EMV technology and others have not; (2) some card issuers have distributed new EMV cards to their customers and others have not; and, as this New York Times story indicates, (3) some merchants have made a good-faith effort to update their technology, but await certification of their EMV systems before they can actually deploy them.

Driving both the adoption of EMV systems and the frustration of merchants awaiting certification of their systems are default rules governing which party bears the cost of fraudulent transactions. Historically, card issuers assumed default liability for fraudulent purchases in order to drive consumer and merchant acceptance of card transactions. However, as fraudsters have become more sophisticated at counterfeiting magnetic-stripe debit and credit cards, card issuers have promoted the adoption of the harder-to-counterfeit EMV technology. The incentive for merchants to adopt the new technology was a change in contract terms governing default liability for fraudulent transactions. After October 1, 2015, liability shifted to merchants who failed to implement an EMV system, unless the card issuer has failed to issue an EMV chip card to the customer. However, complicating the transition for merchants is the requirement to obtain certification of their EMV systems by payment-processing companies, many of which have financial ties to card issuers.

This piece could be used in the classroom to motivate a discussion about the role of legal and contractual default rules in shaping our judgments about ethical business practice. >>>

LINK: Chip-Card Payment System Delays Frustrate Retailers (By RACHEL ABRAMS for The New York Times)

The long delays are just the latest black eye for the deployment of the new systems. Some consumers have not yet received new cards. Many merchants have not bought the updated equipment. And even when the cards and the terminals have been updated, they have generated confusion and slow lines.

Many of the complications were widely predicted, but the certification system has added an unexpected wrinkle — and lots of finger-pointing.

Banks say that retailers waited till the last minute to update their terminals. Retailers point to financial ties between the banks and the companies that provide certification, saying there is no motivation to move faster.

What do you think?

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