Hence the creation of option #1, which would be much simpler to administer, since the costs of implementing new technology could be easily tracked apart from existing fraud prevention costs. Although the merchants would still be paying for the banks to improve their fraud prevention systems, the Fed could choose technologies that would ensure that the merchants share in the benefits of lower overall fraud rates.

As I was preparing for the panel, it became obvious to me that this was the opportunity to finally get the United States onto smart cards. Smart cards, or "chip and PIN" as they are sometimes known, have been widely adopted all over the world as a safer alternative to traditional magnetic stripe cards. Not only are smart cards harder to counterfeit, but the encrypted key they bear is much harder to read than the data contained on a magstripe. With modern chips, it is possible to generate unique codes for each payment, ensuring that even if the encryption is cracked, the card data cannot be reused for another transaction.

However, smart cards have never been adopted in the United States, because the analytic fraud prevention systems are so good that fraud rates have remained below 0.001% of the transaction value, and any further reductions smart cards might offer would not offset the cost of manufacturing and issuing them. On the merchant side, the cost of upgrading terminals to accept the new cards would similarly be too high relative to the reduction in fraud costs.

Under the new law, the Fed has the power to change this equation. By allowing card issuers to recover some of the costs of issuing smart cards in the form of higher interchange, it could make it profitable for banks to issue smart cards. At the same time, card networks such as Visa and MasterCard could then impose a liability shift policy, similar to that deployed , where any merchant who chooses not to upgrade their terminal to read the chip bears all responsibility for any fraud that results. This would give merchants a strong financial incentive to upgrade their terminals, and within a short time, the entire payment card industry would have migrated to smart cards.

Surprisingly, I found no support for this position amongst my fellow panelists, who apparently feared that the Fed would make bad choices about which technologies to support. This might be understandable if smart card were not already well established and in operation around the world. Even Richard Oliver, who in favor of setting a roadmap to EMV just over a month ago, and was on the panel following mine specifically to discuss EMV, would not (for what I hope are legal reasons) endorse my proposal.