Thursday, April 5, 2012

Chip and PIN Credit Cards: Why your next credit card will have a chip in it.

If you take your credit card out of your purse or wallet and look at it, you'll see it has a magnetic strip on the back.  You're probably used to this because you have to line the card up the correct way when your swipe it through the reader at the gas station or ATM.  But if you live in Europe, your credit card has a chip in it, and when you use the card you must enter a PIN number with it.

Why do Visa cards in America have a strip, but in the United Kingdom or Italy they have a chip? (On the card above, the chip is the gold rectangle in the upper left.)

Years ago, Europay, Mastercard and Visa joined forces to produce the EMV standard--a new type of card with a microprocessor chip embedded in it that stores encrypted data.  Their idea was to fight fraud.  For instance, in an American restaurant you hand the server your card, and they take it off to the register, swipe it, and bring you the bill to sign.  In Europe, the server brings a mobile reader to your table, you zip your card through, and input your PIN number to pay the bill. 

When the EMV system was introduced in the United Kingdom, it made a big dent in fraud, or at least forced criminals to try other methods.  So why hasn't it come to the United States?

There are two reasons, and of course they have to do with money.

The first is the cost.  If every merchant, from the small mom-and-pop pet store to the huge grocery store chain, has to replace their current readers, the cost of the new EMV reader is a real concern.

Another problem is that producing a card with a chip costs more than producing a card with a magnetic stripe.  Multiply that cost by the number of customers you have, and you can see how banks might be reluctant to replace all those cards.

The second big reason is liability.  Currently in the US, if someone steals your credit card number, you're only liable for the first $50.00.  And often your bank covers that cost to keep you happy so you won't switch to another bank.  The banks would like to shift that cost off their backs and onto the stores and you. 

By issuing a new EMV style card with a magnetic strip as a backup, banks will cover themselves.  The cards will work on the new machines around the world, and if they're put into an old machine, the magnetic strip will serve as a backup so the sale will still go through.  The key is that the bank will no longer take responsibility for fraud if the magnetic strip was used, and will shift the cost to the individual store.  And if your PIN is misused, the bank will charge you for the loss.

There is also the question of whether the chip and pin cards are truly more secure.  A card with a chip in it will probably be harder to clone than a simple magnetic strip card, which may help cut fraud.  Also, if someone steals your EMV card, they can't use it if they don't know the PIN number. 

Will this eliminate fraud? No, criminals will always try new techniques.  For instance, in countries that use chip and pin cards, fraudsters have learned to do 'card not present' scams by using the card over the phone or the Internet.  But this is a never ending cycle, and does not invalidate the gains made by using the encrypted EMV card.

Customers in the US will be seeing these cards soon.  Visa plans to issue EMV cards in 2012, and Mastercard in 2013.

I imagine EMV will finally become the worldwide standard, but how long will it last as more people use their smart phones to make purchases?

(I found very helpful material in articles in The Economist, Bankrate, and PC Magazine.  The picture is from: MerchantAccount.)
(For a fascinating look at the criminal practice of credit card cloning and fraud, read KINGPIN by Kevin Poulsen.)

(If you find this article useful, please support this blog by purchasing one of my novels.  Thanks.)

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