Got The Chip Yet? The Ins and Outs of the New Chip Credit Cards

New credit cards have been arriving in the mail. They look like the old credit cards you have used for years, except they have a tiny chip inserted on one end of the card. What are these new Chip cards and how will they impact your credit card account and transactions you make?

Why Is the Chip Card Needed?

Large retailer security breaches have highlighted the need for better protection of customer data obtained through credit card transactions. Existing magnetic strips transfer customer data electronically to the retailer’s database. If hackers gain access to the company’s data, they can sell customer information because it is reusable until the fraud is detected and the card canceled.

The new chip card encrypts data from the bank and instead of sending detailed customer information a one-time code is sent to authenticate the purchase. The merchant will never obtain or store sensitive customer information for authorization obtained through chip technology. Due to the encrypted information and single use code, even if a hacker were to gain access to the company’s system, the information is not useful for new transactions.

History of The Chip Card, From France to You:

Microchip cards, also called Chip, EMV, Smart cards, or ICC (integrated circuit card), were introduced in France in 1992 and quickly expanded throughout Europe during the 1990s. The US began implementing this technology in 2014 because of the high cost of conversion involving both front end and back end systems: The infrastructure must be in place, retail merchant terminals updated, and consumer education on using the new cards.

While the deadline was October 1, 2015, it is only the beginning of the conversion process: Only 27% of retailers and merchants had upgraded systems by the deadline. The October deadline is significant for merchants because fraud liability then transferred from the credit card provider or bank to the merchant. Before October 1, 2015, account fraud was absorbed by the banks as infrastructure improves a larger percentage of transactions will be processed through the new, more secure system. The goal is to have 98% of in hand credit card activity moved to the new chip technology by the end of 2017. Today, if the retailer has not upgraded their terminal and fraud occurs, the merchant will take the loss. The transfer of liability has strongly encouraged retailers to convert to the upgraded terminals, which is rapidly making smart cards more frequently used. Smaller businesses, which experience less fraud, will likely be the last to invest in the new equipment required to accept the chip enabled cards.

How Are the Cards Used?

Chip cards are either PIN or signature cards, much like current debit cards. Since magnetic strip credit cards are almost exclusively signature based transactions, most credit card providers are issuing signature based chip cards instead of PIN cards because it is a more familiar process for consumers.

PIN purchases are the more secure option: the Federal Reserve estimates that they are 700% more secure than a signature purchase. Over time credit cards are expected to gravitate towards PIN transactions because of the higher level of security they offer. As that happens, customers will be able to use PIN numbers for credit transactions, rather than only debit card transactions connected with a bank account.

Chip cards may also be contact or contactless. Contactless cards use a remote signal to read the cards information. The process for contact cards involves inserting the credit card into the terminal at the point of sale. Credit card companies are sticking close to current consumer activity, and issuing contact cards, although the increase in the use of pay systems like Apple Pay may soon change that.

What Has Not Changed

Gas stations will not upgrade until 2017.

Manually keyed online and over the phone transactions will not change.  Chip cards only provide greater security for ‘card in hand’ transactions. Manual purchases requiring the security code option is an additional layer of protection against unauthorized use.

The physical theft of credit cards will not change as long as signature cards are the preferred method of payment by consumers. As transactions move to PIN-based activity, using a stolen credit card will become harder.

Going Forward

Due to the increased level of security, using the chip-based option can save you the headache of dealing with stolen personal information. Even though banks or merchants will cover most losses, it still requires your time when fraud occurs on an account. Improved fraud protection can save you hours of time and a reduction in the frequency of fraud.

If you have not received an upgraded credit card, you may request to have one sent. Most credit card providers are upgrading customers automatically. The rest is a matter of changing habits. Instead of swiping your credit card, insert the chip card at the bottom of the terminal, and leave it in place throughout the approval process.

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