In an effort to make the legislation more amenable to the banking industry and retailers alike, California lawmakers tweaked a bill that requires the use of microchip technology in payment cards.

Previously, Senate Bill 1351 would have required card issuers to use microchip-embedded payment cards and retailers to adopt the necessary processing technology by April 1, 2016. Small retailers and gas station pump payment terminals have a later deadline of October 1, 2017.

After January 1, 2015, any contract between a financial institution and a payment card network must include a provision requiring that 75 percent of new or replacement cards issued to California residents after the April 2016 effective date must have microchip technology.

Facing opposition from both the retail industry and financial institutions, legislators made multiple changes to the law.

First, they removed a requirement from the proposal that would have required retailers to embed microchips in store-specific cards. Unlike debit and credit cards, no evidence of fraudulent activity was associated with store-specific cards lacking a credit card logo, the legislators said.

A second revision would permit the use of alternative technology so that payment cards could be “equipped with embedded microchips or any other technology that is more secure than static magnetic stripe technology for card-present fraud prevention.”

In a third adjustment, the bill now explicitly states that if enacted, it will not affect liability contracts – both existing and future – between financial institutions and retailers.

According to the legislation, over 80 countries now utilize microchip technology for credit cards, leaving the United States as one of the few holdouts relying on magnetic stripe technology. Microchip technology is preferable to magnetic stripe “because identifying information is encrypted on an embedded microchip, which is more difficult to counterfeit than a magnetic stripe.” The authors of the bill cited a report that merchants and banks lost $11.3 billion in 2012 due to credit card fraud.

Although the bill failed to come to the full state Senate for a vote, and accordingly must be reproposed in a new legislative session, Visa and MasterCard’s implementation of EMV still stands.

To read the amended legislation, click here.

Why it matters: The California Bankers Association had spoken out against the proposed legislation, arguing that the April 2016 deadline does not allow banks enough time to transition to the microchip technology. “CBA believes this measure negatively impacts banks of all sizes, creates substantial costs to the industry and our customers, increases compliance risk and heightens legal exposure,” the group said in a statement. Because this legislation may emerge in the next legislative session, the legislation requires careful monitoring, since its impact, even as amended, may be significant on card issuers and retailers.