Target Steps Up to Protect Consumers. Will Other Retailers Follow?

Target is making a big move to protect its customers. However, other retailers could be reluctant to follow suit.

May 1, 2014 at 4:00PM

Target (NYSE:TGT) is in full damage-control mode after a data breach in December left as many as 70 million customers vulnerable to identity theft and credit card fraud. The retailer this week named data security specialist Bob DeRodes as its new head of information technology, effective May 5. Target also announced plans to transition all of its Target-branded credit and debit cards to MasterCard's (NYSE:MA) chip-and-PIN technology, as another way of better protecting customers while they shop in Target stores.

"I believe Target has a tremendous opportunity to take the lessons learned from this incident and enhance our overall approach to data security and information technology," CEO Gregg Steinhafel said in a press release announcing DeRodes' appointment.

This massive data breach should serve as a warning to other major retailers. However, the costs of switching to chip-based credit card technology have so far deterred other stores from following Target's lead.

Weighing the costs
Like most dealings in corporate business today, what this boils down to is costs. A nationwide rollout of this chip-and-PIN technology across the board could cost anywhere between $25 billion and $30 billion, based on estimates from the National Retail Federation. This is one reason why Target and other U.S. retailers have been reluctant to move to this more secure platform.

In fact, Target had teamed up with Visa (NYSE:V) more than a decade ago to introduce smart cards in its stores. The retailer reportedly invested $40 million in the joint venture between 2001 and 2004, while Visa contributed $25 million to the chip-based tech. Target even updated 37,000 in-store payment terminals and designed a new computer system to handle the smart cards, before ultimately scrapping the plan, in part because of overbearing costs.

It took tens of millions of people having their personal information stolen from the retailer for Target to finally commit to the more secure payment system. Also, starting in October 2015, Visa and MasterCard will begin holding merchants accountable for fraud linked to a transaction in which a card using the chip technology was available but could not be used, according to The Wall Street Journal.

A more secure future
This gives U.S. retailers until the end of next year to upgrade their payments systems. However, Bloomberg quoted Richard Crone, chief executive officer of payments advisory firm Crone Consulting, as saying that over 50% of U.S. retailers would not meet that deadline. In addition to the high costs associated with upgrading, many retailers worry that this new software will slow checkout times.

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Prototype of chip-enabled Target cards. Source: Target.

For now, the major retailers embracing the upgrade include Target, Wal-Mart, and Kroger. Wal-Mart already has the chip-based technology installed across all 4,838 of its U.S. retail locations today, although the system is only active at 1,000 of those stores. Wal-Mart plans to have all of its stores running the new platform by the end of the year.

Target is spending more than $100 million to convert its REDcard-branded credit and debit cards to chip-and-PIN technology by early next year. As part of that investment, Target will install new payment terminals in all 1,797 of its stores throughout the U.S. this year. This is a start, and it's certainly the right move for Target given the massive data breach at its stores last year. However, it will take time before we see a meaningful shift by other retailers to the new chip technology.

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Tamara Rutter owns shares of Target. The Motley Fool recommends and owns shares of MasterCard and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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