I love incentives. They can explain strange behaviours and can help motivate people (inside and outside organizations).
Incentives are all about Target’s latest behaviour.
After the last breach in which at least 40MM credit cards were stolen, Target’s CEO is now in favour of a chip-on-card system. This is unsurprising; after all, merchants often get held responsible for fraudulent charges – and chargebacks that are validated often come with a hefty fixed fee for the merchant per chargeback – and Target is especially vulnerable after having been responsible for its breach.
What is somewhat less obvious is why Target is so interested now. After all, Target was one of the key supporters of chip-systems around a decade ago, right when the UK, Europe and Canada were adopting them. According to the above article, credit card fraud has dropped by 70% (!) since the adoption of chip-and-pin. Target was particularly well-suited, being both a very large national retailer and a credit-card issuer. And yet, Target decided to drop its support after conflicts over the cost of cards (~$1.30 with chip vs $0.10 without) and the longer checkout. Sure, each checkout only took, say, 15 seconds longer, but over a single day with 10,000 checkouts in a store, that is nearly 42 hours of sales wasted; 42 hours of additional employee overtime and store electricals; but most importantly, 42 hours that other people are not checking out.
The great irony is that the Target credit-card team wanted to keep going with its chip-card system; it was the sales and marketing departments, led by current chip-on-card cheerleader and Target CEO Gregg Steinhafel, who put the kibosh on it.
It cannot be the scale of fraud. After all, fraud globally has tripled since 2004, but Target’s revenue has increased 20 times from $3.6BN in 2004 to $76BN in 2012! As a percentage of Target revenue, fraud has actually reduced. Granted, this does not look at actual Target losses to fraud, which they do not report, but it would need to multiply by 20 to have even the same impact as a decade ago.
Further, chip-and-pin is not exactly foolproof (no system ever is), as these Cambridge researchers show.
So what changed? Why is Target’s CEO suddenly so keen on chip-cards?
In a word: optics. Target needs to focus intently on gross margins, operating margins, market positioning, all of the usual elements that affect any business and especially a retailer. And, yes, the direct impact of card fraud on Target’s bottom line is no worse than a decade ago, actually, probably, quite a bit better.
But Target is acutely aware of its customer perception. It isn’t that fraudulent cards were used at Target, or that someone hacked into the Target back-end systems. They hacked into the point-of-sale, leaving customers feeling their actual physical card, something they carry in their wallet close to their bodies, was tainted.
Target is concerned that consumers will view Target as a place where someone, to put it crudely, stuck a hand in their pants pocket. To combat it, Target needs to create a perception of a place of safety.
Target isn’t trying to combat fraud, although adopting chip-cards will help. Target is trying to restore its image so customers feel comfortable shopping there. It is not about actual fraud, it is about perceptions. It is about the optics.
Will this help? Yes. If the optics drive Target to do the right thing, and a $76BN retailer’s adoption of technology adds a lot of weight to the effort, then it is good for everyone. If the perceptions and actual benefits align, then it is good for everyone.