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Several huge data breaches over the past two years have showed just how vulnerable outdated magnetic strip credit cards can be. While credit card data theft is now a fact of life, new credit card technology is promising to reduce fraud and risk for both merchants and consumers alike. Here's what you need to know about credit card chip and pin technology (also know as EMV), including which card issuers offer it today and what it means for you.
Why is Change Necessary?
About 50% of all credit card fraud occurs in the U.S., even though the U.S. accounts for just 25% of all credit card transactions. Every year, banks in the United States spend billions to pay back consumers who have been the victim of fraud and identity theft. Some estimates anticipate that card fraud will cost $10 billion this year alone.
In an effort to combat this fraud, by the end of 2015, millions of consumers in the U.S. will have switched from magnetic strip credit and debit cards to new cards with computer chips that store data more securely. That's about half of all debit and credit cards in the U.S.
Magnetic strip technology is more than 50 years old. Since magnetic strips easy allow thieves to copy information, it's been replaced with more secure technology in most of the world.
While EMV technology will certainly not make data breaches a thing of the past, it does make it harder for thieves to capitalize on card-present fraud, such as the recent breaches at Target and Home Depot.
How Does Chip & Pin Technology Work?
This new technology is called by many names, including smart cards, smart chip cards, or EMV cards. EMV stands for EuroPay, Mastercard, and Visa.
New debit and credit cards will have a small computer chip embedded into the card that stores data. This chip assigns a unique code to every single transaction made. This means that even if a thief obtains the code, it cannot be used for a new transaction. Stealing that code is basically like stealing an expired password.
Chip credit cards are also more difficult to duplicate or clone. Magnetic strips, in comparison, store data that never changes. Anyone who is able to gain access to this information has all the data they need to make purchases or even clone the card.
The chip technology that is being introduced in the United States is similar to technology that has been in use throughout Europe for more than a decade. The cards will not work quite the same, however, as U.S. chip cards will still need a signature during a transaction. Eventually, the system used in the U.S. will be like what is used throughout the world -- technology often referred to as "chip and PIN".
There are currently some U.S. credit cards with PIN capability, which means they can be used abroad at terminals that require a PIN. Over the summer, you will start to see more and more cards introduced with the chip.
The technology works similar to an ATM card.
How is a Chip Card Used?
Credit cards with chip technology are used a bit differently than those with a magnetic strip.
Instead of swiping a card at checkout, you will need to insert your card into a machine with a slot, similar to an ATM. You will need to leave your card in the machine until it tells you to remove it.
This is called "card dipping" instead of swiping. When a chip card is dipped, data will flow between the chip and the issuing bank to verify the authenticity of the transaction and generate a unique code.
EMV or chip cards can also support near field communication (NFC), or contactless card reading. Rather than swiping or dipping the card, a card that's equipped with NFC can be tapped against a terminal, which then picks up card data from the chip.
Most major retailers have already made the switch and upgraded to EMV terminals. Some of the fastest retailers to adopt the new technology include Costco, Sam's Club, and Whole Foods, although most major stores are expected to have chip readers by fall 2015, according to the New York Times.
How Will This Impact Businesses?
As credit card issuers and banks transition to more secure chip technology, merchants and retailers will be required to update their terminals to allow for chip transactions rather than the current "swipe and sign" transactions. Merchants that do not make the transition in time may be left on the hook for the cost of any fraud (instead of the card issuers bearing the cost).
There is currently a "soft" deadline of October 1, 2015, for merchants to make the change. After that point, most merchants who still accept magnetic strip debit and credit cards and have not updated their terminals may be liable for any fraud that occurs.
Right now, 45% of retailers will likely miss the October deadline. It's important to note that President Obama announced last year that credit card providers must issue secure chip cards to customers by October, and this deadline applies only to card issuers. Merchants are not required by law to upgrade their systems by this deadline, although it's certainly important if they want to reduce liability.
Small businesses, especially, have been slow to bear the cost of updating their credit card terminals and point of sale systems to accept EMV cards. Currently, the new terminals cost between $500 and $1,000 per unit. However, once the deadline passes in October, the shift in liability for credit card fraud should incentive them to accelerate adoption of updated systems.
Are EMV Credit Cards Available Yet?
Many cards have already been upgraded ahead of the "liability shift" deadline. Most major issuers already offer chip technology. If you have not yet received a new credit card with the chip, you can request a replacement from your issuer to take advantage of the more secure technology.
However, you should be aware that there will be a transition period where card continue to have both magnetic strips and the EMV chip. This will allow cards to continue to function in all situations until the changeover is complete.
But even if you do not have your new EMV card yet, you have nothing to worry about. Even after the October 1st deadline passes, businesses will still be able to accept magnetic strip cards. And the real point of the deadline is to shift liability from banks to retailers. So consumers should not be affected, other than having to activate new cards.
Last Updated: September 2, 2015