About 60 percent of payment terminals, such as the one above, will have been upgraded to accept chip cards by the end of next year. Among major retailers, Walmart is leading the transition — almost all of its terminals accept the cards.
Courtesy: EMV Migration Forum
The smart card sports microchips and replaces credit and debit cards using familiar magnetic stripe technology.
By Patricia Sabatini / Pittsburgh Post-Gazette
Get ready to do the chip and dip.
After years of delays, the U.S. is catching up with Europe and elsewhere, replacing credit and debit cards using familiar magnetic stripe technology with smart cards sporting microchips.
Instead of swiping at the register, shoppers will have to get used to inserting, or “dipping,” their cards into a reader — similar to the way cards are used at ATMs, with similar potential for leaving them behind.
So far, the rollout has been slow. Only about 10 percent of the some 1.2 billion credit, debit and prepaid cards nationwide are expected to be replaced with smart cards by the end of this year.
But the pace should accelerate quickly ahead of the October 2015 conversion deadline set by major card networks for retailers and card issuers to be ready, or to bear the cost of certain fraudulent transactions.
The chief advantage of smart cards — also called chip cards or EMV cards for Europay, Mastercard and Visa — is more protection against fraud, which amounts to some $5.5 billion annually in the U.S. alone.
Smart cards are safer chiefly because they generate a one-time code for each transaction, thwarting thieves who use stolen account numbers to make counterfeit cards.
The cards work similar to the recently announced Apple Pay mobile pay system for iPhone users, which creates a one-time payment number for each purchase and can be used in stores that accept contactless payments such as McDonald’s and Walgreens.
Typically, cardholder names and numbers are pirated by hackers who break into payment systems — such as during the massive data heists at Target and Home Depot in the last year — or lifted by counterfeit card readers called “skimmers,” and sold on the Internet.
If the scammers who perpetrated the security breaches at Target and Home Depot had intercepted data from chip cards, they would not have been able to use the information to make fraudulent cards, said Randy Vanderhoof, executive director of the Smart Card Alliance, a New Jersey-based association of banks and payment companies.
“Chips generate a unique security code for each transaction, so if that payment data were stolen and reused a second time, the issuer would recognize a copy of the transaction and flag it as an invalid card and reject authorization,” he said.
What’s more, it’s prohibitively expensive and complicated for fraudsters to duplicate an individual’s code-generating chip card, said Michael Benardo, chief of the cyber-fraud and financial crimes section at the Federal Deposit Insurance Corp.
“The algorithm would be near impossible to re-create,” he said. “This has been proven in Europe and Australia and other places where they've already switched to chip cards. They've seen fraud rates decline greatly,” he said.
Still, smart cards have their limitations.
The cards don’t help prevent fraudulent purchases online, over the phone or through the mail (so-called card-not-present transactions) because those types of transactions don’t generate secret security codes.
And smart card technology does not stop thieves from making purchases with lost or stolen cards.
That type of fraud could be curbed by requiring credit card holders to enter personal identification numbers as another layer of authentication on purchases, since PINs can’t be faked like signatures.
While debit cards already require PINs, most banks are expected to keep the current system of signing for credit purchases in an effort to minimize disruptions for customers. Retaining the current system also avoids the cost of upgrades to payment networks for such things as allowing cardholders to reset their PINs.
“Financial institutions we've spoken to are trying to implement EMV in the fastest and least costly [way], and the most convenient way for cardholders,” Mr. Vanderhoof of the Smart Card Alliance said.
As card issuers continue to replace expiring magnetic stripe cards with chip cards, swiping eventually will become as obsolete as dialing a telephone. But that will take awhile.
“Taking the world’s largest card market from mag stripe to EMV is a massive undertaking,” the Boston-based consultant Aite Group said in a report this summer.
Aite projects that roughly 70 percent of credit cards and 40 percent of debit cards will be chip-enabled by the end of next year.
But forecasters at Javelin Strategy & Research in California say it will take until the end of 2018 before 98 percent of cards nationwide have been converted.
So far, major financial institutions including Chase, Citi and Bank of America have been leading the way by updating certain segments of their portfolios to smart cards, such as their co-branded airline and hotel reward cards.
PNC Bank, the biggest bank in the Pittsburgh region, expects to begin the transition to smart cards by early next year, spokeswoman Marcey Zwiebel said in an email.
On the retail side, it’s projected that roughly 60 percent of payment terminals will have been upgraded to accept chip cards by the end of next year, according to the Smart Card Alliance. Stragglers will include gas station operators, who have been given an extra two years (until October 2017) to convert to smart cards because the switch will be more complicated.
Among major retailers, Walmart is leading the transition, Mr. Vanderhoof said. “We believe Walmart is close to 100 percent operational,” he said.
Target and Home Depot have installed the new hardware for accepting chip cards but aren't ready to activate the terminals, he said.
For the foreseeable future, smart cards also will contain a magnetic stripe so they can be used at stores that haven’t upgraded their card readers.
“We expect mag stripes will be around for a number of years to come until all merchant locations have replaced their terminals,” Mr. Vanderhoof said.
Globally, card fraud amounts to some $11 billion annually, with the U.S. accounting for roughly half that total even though the country only produces about one-third of all card transactions, according to Mr. Vanderhoof.
The disproportionate share of fraud is largely due to the nation’s reluctance to switch to chip technology, he said. The delay allowed thieves to turn away from countries with more secure payment systems and focus on easier targets.
He advises consumers who haven’t already received a chip card from their financial institution to request one to help protect their payment data.
Although fraud adds costs to the payment system, card fraud is chiefly a matter of inconvenience for consumers, since cardholders generally are not liable for fraudulent transactions, Mr. Vanderhoof noted.
“Consumers just need to be aware of what is changing so they aren't inconvenienced or surprised.”
Patricia Sabatini: firstname.lastname@example.org or 412-263-3066.
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