This story, originally published on May 9, was updated to include data from Blackhawk's 10-Q filing with the Securities and Exchange Commission and CEO comments on the impact of EMV for the full year.
As more and more shoppers find their new and replacement payment cards studded with so-called EMV chips to make their money safer, corporations such as Safeway's spinoff Blackhawk (HAWK) are finding themselves increasingly at risk.
Blackhawk -- whose shares are down 27% on the year -- has cited the regulatory-mandated introduction of EMV chips, which was adopted last October for card issuers and store processors, as a hazard for its current business model.
How big a hazard? Pretty big, judging by this statement in their 10-Q filing:
"On October 1, 2015, the payment card industry shifted liability for certain debit and credit card transactions to retailers who do not accept EMV chip technology transactions. As a result, some of our non-EMV compliant retail distribution partners have taken restrictive measures around the sale of gift cards, in particular higher denomination open loop gift cards and some closed loop gift cards. These measures include establishing lower limits on credit card purchases of gift cards and removing higher denomination products from displays in impacted markets to mitigate their liability for fraudulent credit card activity in their stores, which decreased our transaction dollar volume."
And based on the new restrictions surrounding EMV cards, Blackhawk CEO Talbott Roche predicts a direct impact on 2016 sales of $29 million on operating revenues and $30 million on adjusted EBITDA, which is a standard valuation metric standing for earnings before interest, taxes, depreciation and amortization.
"We are seeing forecasted compliance dates slip at multiple retailers due to the complexities around testing and certification of their point of sale EMV upgrades, creating risks that dates could move out," she said on the company's April earnings call with analysts.
And the Pleasanton, Calif.-based giftcard network, which finalized its spinoff from supermarket chain Safeway in April 2014, is hardly alone. Supermarkets themselves are finding the giftcard sales department shrinking and costs mount as counterfeiters and fraudsters increasingly turn to giftcards, which generally use a traditional swipe-and-pay system, for online payment theft.
Supermarket chain Kroger (KG), for example, cited EMV chargebacks as a primary driver in its increasing operating costs, which increased to more than 16.3% of 2015 sales, up from 15.8% in 2014.
EMV cards, which are named after the card giants that helped pioneer the security technology -- Europay, Mastercard (MA) and Visa (V) -- are aimed at thwarting identity thieves, counterfeiters and hackers who have found ways to profit from more tradtiional swipe-and-pay cards.
Banks increasingly have begun to dole out the new cards, which is great news for unwitting shoppers who may have misplaced an ATM card or left the face of a credit card exposed on their dashboard window. But companies that have their bread-and-butter sales tied to gift cards could be at risk, as thieves resort to online gift card shopping as a last bastion of fraud.
"On October 1, 2015, the payment card industry shifted liability for certain debit and credit card transactions to retailers who do not accept EMV chip technology transactions," the company said in its first-quarter filing with the SEC. "As a result, some of our non-EMV compliant retail distribution partners have taken restrictive measures around the sale of gift cards... [including] establishing lower limits on credit card purchases of gift cards and removing higher denomination products from displays in impacted markets to mitigate their liability for fraudulent credit card activity in their stores, which decreased our transaction dollar volume."
Previously, if an in-store transaction was found to have been made with a counterfeit or stolen card, the liability would be carried by the issuing bank or processor, depending on the specific gift card terms. But after the October deadline, the liability for card-present fraud shifted "to whichever party is the least EMV-compliant in certain fraudulent transactions," according to the U.S. Small Business Administration.
And as gift cards increasingly become more of a liability for merchants, retailers also may feel the pain as their portion of gift card sales declines.