From
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Smart cards that comply with global payment standards are set to take the Latin American market by storm now that previous barriers to the adoption of EMV cards - high cost, the small card user base and lack of guidelines in the region - have been overcome.
The use of EMV cards (smartcards that comply with the global standard for payment systems) is exploding in some Latin American applications, such as prepaid wireless and closed-loop stored value cards. But the conversion from magnetic-stripe cards to EMV cards in the region's banking sector, which was loudly predicted five years ago, has not yet happened. InfoAmericas believes the region will see watershed change, with rapid EMV card adoption over the next few years.
Two important obstacles that stood in the way of this transition are now being overcome. The first was the lack of uniform acceptance guidelines in a region dominated by international banks. Until recently, there were no well-established specifications that could allow smooth adoption of the EMV standard across terminal platforms that vary from country to country. The second obstacle was the enormous cost of transitioning to EMV technology given the relatively small card base and its concentration in the affluent market. The benefits to financial institutions, retailers and cardholders were not seen as sufficient to justify the switch, especially considering that EMV cards are also more expensive to produce than magnetic-stripe cards. The market was stuck in a gridlock situation where no EMV terminals were being installed because there weren't enough EMV cards in circulation, and banks were not issuing EMV cards because there weren't enough terminals.
Debit and Credit Cards Reach Critical Mass
Now, however, sustained growth in the debit and credit card market has finally established the critical mass necessary to drive EMV implementation. Twenty-five million new credit cards have been issued since 2001, while the number of debit cards in circulation expanded by more than 30 per cent. This has created the economies of scale needed to support implementation of a variety of EMV card solutions and products.
Previously, the most compelling arguments for adopting EMV cards did not apply to the Latin American market. The card base was too small for issuers and retailers to benefit from the enhanced customer profiling capabilities that EMV cards offer. Fraud was also seen as insufficient justification, since until 2003 the incidence of card fraud in the region was among the lowest in the world.
Other less prominent factors also contributed to the reluctance to adopt EMVs. Many Latin American banks were in the midst of consolidation or acquisition, which was poor timing for any new technology. Banks were focused on expanding their market presence through expanded ATM networks and promotion of financial services. Retail loyalty programs were also limited, as a result of shaky economic recoveries and a generally unsophisticated and untested consumer market.
Fraud Reduction is the Leading EMV Driver
The Latin American card market has grown rapidly over the past few years as it shifted focus towards new lower socio-economic segments and multiple card possession. The expanding card base fostered an increase in fraud, which in turn strengthened the economic case for EMV card adoption. Although the fraud-loss rate in Latin America remains below 0.4 per cent, it is nearly five times higher than in the US market, and growing an alarming 12 per cent a year.
A recent InfoAmericas study revealed that only about half of the banks surveyed believed that the level of card fraud in their portfolios had already reached unacceptable levels. On the other hand, 73 per cent stated that, within the next three years, fraud levels will reach a point where they cannot be offset by portfolio growth, leading to the adoption of EMV cards. Pilot tests conducted by Visa indicate that counterfeiting can be cut by 70 per cent and fraudulent use of lost and stolen cards could be chopped by 90 per cent with EMV cards. Visa and MasterCard are also in the process of changing the rules that allocate responsibility for fraudulent charges, and they will apply these new rules to Latin America beginning in January 2006. After that, the cost of any fraudulent transaction that could have been prevented with EMV technology will be shifted from the card issuers to banks not using EMV.
