What is EMV?
It isn’t easy to write what is EMV so I want to write from the beginning.
I will write a series about EMV. This is going to be the first post of this series.
Everything started in the ‘50s…
History
The first card in history was created in 1950 by the diners’ club. For businessman Frank McNamara, forgetting his wallet while dining out at a New York City restaurant was an embarrassment he resolved never to face again. Luckily, his wife came to bail him out and pay the tab. But little did he know that dinner would become an important part of credit card history. A year later in February 1950, he returned to Major’s Cabin Grill with his partner Ralph Schneider.
When the bill arrived, McNamara paid with a small cardboard card, known today as a Diners Club Card. The event was hailed as the First Supper, paving the way for the world’s first multipurpose charge card.
In the ’60s Bank of America issued 1M cards and licensed these cards in the USA. In 70’s more than 3000 banks licensed, and Bank of America branded this service as Visa.
Mastercard, originally known as Interbank from 1966 to 1969 and Master Charge from 1969 to 1979, was created by an alliance of several regional bankcard associations in response to the “BankAmericard” issued by Bank of America, which later became the Visa credit card issued by Visa Inc.
Meanwhile, in Europe, Eurocard was introduced in 1964 by a Swedish banker in the Wallenberg family as an alternative to American Express. In 1968, it signed a deal with the Interbank Card Association so that their cards were accepted by each other’s networks; this eventually led to a joint venture known as Maestro International in 1992, and a merger in 2002.
The Eurocheque was a type of cheque used in Europe that was accepted across national borders and could be written in a variety of currencies.
Eurocheques were originally introduced in 1969 as an alternative to the traveler’s cheque and for international payments for goods and services. They were rapidly adopted for domestic use in several countries.
Europay International was born as a merger of Eurocheques and Eurocard in the 1990s then, Europay International merged with Mastercard and Mastercard Europe was born. Today Mastercard and Visa are both used all over the globe.
The Evolution
In the ’50s there were zip-zap devices to record the transaction. “Zip-zap” machines that copied the card imprint on carbon paper were made and given to merchants for $25 each. Stores were mandated to give %6 of each purchase to the bank. Any fraud that occurred would be the responsibility of the bank, not the store not the legitimate card user.
The growth of the mass telephone line made an impact on the payment industry. Transactions are more automated when we compare them to the 1950s. In 70’s cards only had magnetic stripes and transactions were sent to the issuer for authorization via the telephone line. When we came to 90’ s cards had a chip on them and devices read data from that chip. Transactions can be approved online and offline. After 2000 contactless communication and more powerful chips came into the payment industry and the contactless interface of mobile phones, key Fobes, and stickers become new payment devices. Payment technologies evolved in the last 70 years from paper cards and now contactless via mobile and other technologies.
Why Digital Money is important and why do we need it?
Starting from the ’50s, the digital money concept is outgrowing. This concept started with the diners’ club, today it is continuing with cryptocurrencies so what makes digital money important and desired?
The main reasons are efficiency and security.
- Easy to Create: It is digital. There is no printing required according to the cash
- Easy to Store: You don’t need physical places to store it.
- Easy to Move: You can make transactions internationally within any region quickly with high security.
Behind digital money, there are multiple stakeholders and there is a huge industry that feeds the digital money.
The Basics
The payment industry builds on the standards and protocols. There are many terms and parties involved in issuing a payment card and processing transactions.
Issuer
The issuer is a financial institution and the issuer issues a payment product could be a credit or debit card based on the consumer agreement. The Issuer has the responsibility of authorizing and settling card transactions and providing customer service to the consumers with statements or any other form of customer service required. The issuer can be imagined as the cardholders’ bank in the EMV world.
Issuer services
Issuers support cardholders with the following services:
1) Providing cards that can be used to make payments or withdraw cash.
2) Setting credit limits or issuing prepaid cards.
3) Providing customer support, issuing statements, and maintaining a fraud monitoring service.
Acquirer
Acquire is a financial institution that provides acceptance devices like terminals, ATMs, etc. The acquirer has a contract with the merchants. It acquires and settles transactions from an acquired perspective and provides customer service to the merchants. The acquirer can be imagined as the terminal’s bank in the EMV world.
Acquirer services
Acquirers support merchants with the following services:
1) Connect merchants to card schemes and other payment networks to facilitate card transactions.
2) Providing point-of-sale (POS) devices and other equipment required to accept card payments.
3) Managing the transactions and payments to and from merchants.
4) Providing customer service and support to merchants.
Card Payment Scheme (Certificate Authorities)
Payment Schemes have a membership with issuers and acquirers. Payment schemes create payment products and facilitate transactions via their payment networks. They define rules and regulations such as cryptographic operations.
From a business perspective, payment schemes license the product to the issuers to accessing to the network. They act like referees between issuers and acquirers. They make brands and marketing for issuers and acquirers.
From a technical perspective, they create specifications and infrastructures for issuers and acquirers.
From an operations perspective, the payment scheme is responsible for interoperability and transaction routing on behalf of services.
3 Corner Model
In this model, merchants, consumers, and in between which the scheme, are played by one entity. The merchants have contracts with the payment scheme, the cardholders have contracts with the payment scheme because the scheme is issuing the cards.
All these closed-loop systems work on this three-corner model and they have advantages and limitations. The advantage, the consumer and the merchant are contracted to the same party. So, ensuring interoperability is very easy, but the limitations are when you are expanding to different regions, it’s a bit less flexible.
It’s difficult for this scheme to expand in different regions when they are the issuers and acquirers. And they’re bearing more risk since they’re issuing cards to the cardholders. So, they’re bearing more risk with managing the liability of the cardholders. That is one of the limitations. American Express (Amex) and Diners club could be an example of this model.
4 Corner Model
The four-corner model is often called the five-corner model because there are five entities in this model. The merchant is connected to the acquirer, and the acquirer is connected to the scheme. The scheme is connected to the issuer, and the issuer is connected to the customer.
Merchants have contracts with acquirers. Cardholders have contracts with issuers, and the payment scheme has contracts with acquirers and issuers.
Thanks to my company https://paycore.com/emv-in-a-nutshell/ for referring this article. please feel free to checkout our EMV related product offerings.
References
about-us. (2021, 11 12). Retrieved from dinersclub: https://www.dinersclub.com/about-us/history/
Eurocard. (2021, 11 12). Retrieved from Wikipedia: https://en.wikipedia.org/wiki/Eurocard_(payment_card)
Eurocheque. (2021, 11 12). Retrieved from Wikipedia: https://en.wikipedia.org/wiki/Eurocheque
Mastercard. (2021, 11 12). Retrieved from Wikipedia: https://en.wikipedia.org/wiki/Mastercard
Visa: The hard path to being “everywhere you want to be.”. (2021, 11 12). Retrieved from Medium: https://medium.com/@cvpowers/visa-the-hard-path-to-being-everywhere-you-want-to-be-c73889f942fb
