Bank Board Letter April 2015 : Page 2

Although agriculture is the leading commercial activity in the area, the economy is diverse, with numerous tool and die shops and equipment dealerships calling the area home. He can point to a number of local businesses that grew from a customer’s garage, thanks to a loan his bank provided. Despite the rural setting, the bank’s customer base is techno-logically savvy, says Hartings. When the bank rolled out mobile services in 2014, the staff was surprised at how quickly the cus-tomers adopted the technology. Hartings says mobile has helped “leveled the playing field.” He would like to see the playing field leveled in other ways. His bank vies for business with competitors that receive signifi-cant advantages, he says. While credit unions enjoy tax-free sta-tus, his bank supports the community by paying taxes, he notes. The Farm Credit System has grown beyond its stated mission of providing agricultural loans, elbowing in on his mortgage and small-business loan activity. And then there are the “too big to fail” big banks, whose executives are “too big to jail.” He points out that when examiners come to his bank, he meets them per-sonally, whereas a megabank has layers of managers that come between examiners and the corner office. But he is quick to note the positive developments for com-munity banks. He is encouraged that the idea of tiered regula-tions is taking hold. He is keenly interested in educating lawmakers and regulators about the ramifications of Dodd-Frank, particularly with its narrow definition of qualified mortgages with respect to ability to repay, and its effect on communities. He noted that small community banks make up 20 percent of the U.S. mortgage market and represent an outsized share of loans to low-and-moderate income borrowers. “I don’t make money in my bank if I make an unqualified mortgage,” he says, noting that new guidelines leave little margin for a lender to apply discretion. “Maybe the (borrower’s) income isn’t as high as others are but they have more equity in property, more in retirement accounts. There are compensating factors. You find out that not everyone fits in that tight box,” defined as QM. He would like to see the QM rule expanded for small lenders, currently defined as having less than $2 billion in assets and which originate fewer than 500 mortgages a year. “I do close to 500 loans a year, and I know we were not the problem in the lending meltdown of 2005-2009,” he says. “I think back to (the housing bubble), when we saw a lot of mortgages being made; when you had a lot of players taking ad-vantage of customers. I would feel bad when I’d see a customer being financed at 110 percent of value, and I knew the house price was inflated. The mortgage broker might not be from the area, looking to make a quick profit.” That’s why he says, “Our communities are our number 1 regulator. Ask any community banker, we care about the com-munity; we’re not going to put people in a product that doesn’t make sense for them.” He also realizes that there are times that despite his best ef-forts, he cannot offer a loan. That’s when a community banker can make all the difference, he says. “You can counsel your customer. Nothing makes me prouder than when I talk to a customer who didn’t qualify Ð they just started a job, or didn’t have a down payment, and they come back after they’ve corrected issues. When they come back and have shown they have discipline to save, I’m very much willing to help out. That’s what’s made me most proud to be in the lending field.” “As a community banker, I want to make my community bet-ter and take care of my customers. If I can do those two things, the rest takes care of itself.” Here Comes emV: tHe raCe Is on to Issue CHIp Cards by oCt. 1 By Randy VandeRhoof B y all estimations, 2015 is poised to be the “year of the chip,” with major progress in the U.S. migration to the global EMV chip standard for payments. Many card issuers have already begun or are planning to start is-suing chip cards this year. By the end of 2014, there were approximately 120 million chip cards in the market. This number is expected to increase dramatically to 600 million chip cards by the end of this year Ð about half of all of the payment cards in the United States. Retailers are also on board, with some estimating that as many as 50 percent of merchant terminals may be enabled by the end of 2015. As a community bank, how should you start thinking about and planning for issuing chip cards? Let’s look at some of the major considerations. DeciDing to issue chip carDs The first step toward chip migration is to get educated. The deci-sion to issue chip cards is yours Ð it is not a mandate. However, there are many reasons why it is the right decision. First, chip cards provide higher levels of security. Card skimming and data breaches have become a large problem in the United States, due to the grow-ing prevalence of criminals creating counterfeit cards from magnetic stripe data. The EMV standard moves the United States away from static magnetic stripe payment data to dynamic chip data, making counterfeit card fraud extremely difficult. As a card issuer, this can mean fewer financial losses and cards to reissue after data breaches. It can also add reputational benefits. Consumers are now becoming aware of chip cards and the security features they provide. Offering this advanced card technology to your customers can be a differen-tiator and drive loyalty and “top-of-wallet” status for your card. Next moNth: Avoiding the mortgage Lending Conundrum Print + Digital Document management

HERE COMES EMV: THE RACE IS ON TO ISSUE CHIP CARDS BY OCT. 1

Randy Vanderhoof


By all estimations, 2015 is poised to be the “year of the chip,” with major progress in the U.S. migration to the global EMV chip standard for payments. Many card issuers have already begun or are planning to start issuing chip cards this year. By the end of 2014, there were approximately 120 million chip cards in the market. This number is expected to increase dramatically to 600 million chip cards by the end of this year Ð about half of all of the payment cards in the United States. Retailers are also on board, with some estimating that as many as 50 percent of merchant terminals may be enabled by the end of 2015. As a community bank, how should you start thinking about and planning for issuing chip cards? Let’s look at some of the major considerations.

DECIDING TO ISSUE CHIP CARDS
The first step toward chip migration is to get educated. The decision to issue chip cards is yours Ð it is not a mandate. However, there are many reasons why it is the right decision. First, chip cards provide higher levels of security. Card skimming and data breaches have become a large problem in the United States, due to the growing prevalence of criminals creating counterfeit cards from magnetic stripe data. The EMV standard moves the United States away from static magnetic stripe payment data to dynamic chip data, making counterfeit card fraud extremely difficult. As a card issuer, this can mean fewer financial losses and cards to reissue after data breaches. It can also add reputational benefits. Consumers are now becoming aware of chip cards and the security features they provide. Offering this advanced card technology to your customers can be a differentiator and drive loyalty and “top-of-wallet” status for your card.

The other factor for issuing chip cards is the upcoming fraud liability shift date, which is meant to help synchronize the timelines to move all industry stakeholders to implement chip technology. Starting on Oct. 1, the payment brands and debit networks will shift the responsibility for fraud resulting from a card-present payment transaction to the party using the least-secure technology. If you continue to support magnetic stripe-only cards after liability shift dates defined for POS and ATM terminals, you will continue to own liability for fraudulent charges.

TOP CONSIDERATIONS FOR CHIP CARD ISSUANCE
When you have decided to begin building your roadmap for chip card issuance, these are some of the important questions to answer:

What do my service providers offer?
A good first step is to connect with your card issuance and personalization processor (if applicable) and any card service providers to find out what EMV chip migration services they are offering, what capabilities they support and the corresponding timeline and pricing.

When and to whom do I want to start issuing chip cards?
Many banks have taken the approach to conduct a small pilot prior to issuance, and then issue chip cards during their normal reissuance cycles. Now that we are well into 2015, others are taking a more aggressive approach and doing mass issuance of chip cards in order to meet customer demand and the liability shift date. Each community bank needs to weigh the pros and cons of both of these options, as well as the fraud and liability risks associated with their projected timelines.

What are the lead times for issuing chip cards?
The demand is high for chip card production, programming and personalization services. Depending on volume and prior terms of service with suppliers, procurement lead times can range from a few months to more than six months for chip cards and, as the Oct. 1 target date approaches, timelines will get longer. Other items that will affect your timelines for card issuance include implementing your desired chip features and functionality (some may require more time to be loaded onto the card), graphic design (custom art can take up to 12 weeks, but providing a forecast to your card supplier may help), verifying the artwork, testing the cards, planning and executing a pilot (if applicable) and preparation for customer education and support services. Aggressive planning and regular reviews during the project timeline will help to prevent mistakes or costly reissuance problems later on.

What card interfaces do I want to support?
With the EMV standard, you can choose to issue contact-only chip cards or chip cards with both contact and contactless payment capabilities (often referred to as “dual interface” chip cards). One consideration for issuing dual interface chip cards: With the new near field communication mobile technologies like Apple Pay being introduced, it is possible that additional merchants will be supporting contactless transactions in the coming years. It is also worth noting that issuing dual interface chip cards will have impacts on the costs and complexities of your project.

What cardholder verification methods do I want to support?
The EMV standard supports four CVMs: online PIN, offline PIN, signature verification and no CVM. Debit chip cards will support online PIN and no CVM, as they do today, but the EMV standard supports additional options for credit cards as well. For credit, you will need to work with your brand recommendations and processor, as well as weigh cost and complexity considerations, to make decisions about the CVMs (signature, PIN or no CVM) you would like to support. You will also need to prioritize CVMs based on the associated risk of the transaction. For example, no CVM may be used for unattended devices where transaction amounts are typically quite low.

Should you extend the expiration date on the chip cards you issue?
Chip cards typically cost three or four times more than the traditional magnetic stripe cards. Since chip cards are more secure, and in order to maximize the investment, you may want to consider extending the expiration date beyond the typical three years.

When and how should I communicate the card changes with cardholders?
Frequent and consistent communication with your cardholders will be the key to success with your migration to chip. Basic things you will want to communicate are the security advantages of chip cards and advice on how cardholders can use their new cards at the retail POS or ATM. It’s recommended that you communicate with cardholders before, during and after the card issuance cycle and through many channels Ð card statements, website, ATMs and in-branch, call centers, advertising, social media, email correspondence and direct mail are some of the ways to reach your cardholders with chip education.

Randy Vanderhoof is director of the EMV Migration Forum. To learn more, go to www.emv-connection.com.

Read the full article at http://omagdigital.com/article/HERE+COMES+EMV%3A+THE+RACE+IS+ON+TO+ISSUE+CHIP+CARDS+BY+OCT.+1/1978094/253550/article.html.

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