Banks across the country are sending out new credit cards to their customers. The cards are fitted with an EMV chip, a small computer chip used when processing transactions. The chips are important to any business that accepts credit cards. Read on to learn how EMV chips impact your business and the future of credit card payments.
What is an EMV chip?
An EMV chip is a security chip embedded into a credit card. You can see it right in the face of the card. The card to the right has a chip visible below the words “JAL CARD” above the left group of digits in the credit card number.
EMV stands for Europay, MasterCard, and Visa, the three credit card companies that joined together to create the new technology. EMV was first deployed in Europe in 1986 and standards were formalized in 1993. While the technology has been prevalent in Europe for well over a decade, it was just adopted widely in the United States in 2015.
EMV Chips Increase Security
Why would an entire continent and most countries around use chip enabled cards instead of the magnetic strip we are all familiar with? The reason is fraud.
EMV chips are tiny computer chips that can be read by EMV enabled credit card terminals. The chips produce a unique code that cannot be easily copied, unlike the magnetic strip that can be copied with a pocket sized skimming device. The chip sends its unique code along with the transaction information when it is used. If the terminal has a chip reader and the code is not there or incorrect, the transaction is declined. This makes point-of-sale fraud much more difficult for would be thieves.
This is also why chip transactions take longer to process. More information is required to process chip transactions than magnetic strips, so the computer systems need a few more seconds for approval.
You can still swipe your card with the magnetic strip if the terminal does not accept chips, but most terminals in the United States are on their way to being upgraded if they are not already.
The October, 2015 Liability Shift
Because EMV has been a standard in Europe for many years, some American credit card issuers have been issuing chip enabled cards for years. High end travel credit cards were the first to get chips. Chip credit cards cost quite a bit more to produce, so credit card companies were hesitant to produce the cards if the chip was not going to be used.
In October, 2015, however, a major shift took place in credit card liability in the United States. Prior to October, 2015, the banks were liable for the costs of credit card fraud in most situations. Starting in October, 2015, the liability shifted to the merchants if they did not accept EMV chip credit cards. This shift pushed merchants to start accepting EMV and banks to start issuing EMV cards.
This means that today if someone uses a skimmed, fraudulent credit card for a purchase in the United States, the merchant, which could be a small business owner, is liable for the cost. However, if that merchant has an EMV chip processor, the bank is liable for the cost.
EMV processing terminals are more expensive than the old magnetic terminals, so all businesses have not rushed out to buy one. However, over time we will eventually see all card readers use the chip.
Why Fraud Isn’t Go Away with EMV
When you use a debit card, you typically enter a four digit PIN number to complete the transaction. Credit cards in the United States require a signature instead of a PIN. However, in Europe and many other countries, you use a PIN with both a credit card and a debit card.
When the United States adopted EMV, the credit card companies opted for Chip and Signature rather than Chip and PIN to avoid a confusing change for consumers. However, this means that stolen credit cards can be easily used in stores and online. If we had gone to chip and pin, online and in-store fraud would have gone down much more than it is with chip and signature.
NFC is the Future of Payments
Now that we have gone through this expensive, major transition, we have to get ready for the next big thing: near field communication payments. Near field communication, or NFC, is a form of contactless payment that is already available at many merchants. You have likely come across it in the form of Apple Pay, Android Pay, or Samsung Pay.
Paying with your phone is much more secure than paying with a credit card. When you pay with your phone, a unique transaction code is created and used for processing. This code, called a token, is much more secure because your credit card number is not transmitted in the transaction. As long as you don’t lose your phone (or credit card), this is the most secure way to pay.
The Future of Fighting Fraud
The future of credit cards is going to be focused on making payments easier on consumers and more secure for everyone. I believe this will involve a shift to using smartphones for payments all around, but only time will tell for sure.
