Long Overdue Chips Can Finally Protect US Consumers — If Merchants and Media Stop Being Shortsighted

There’s been quite a bit of negative reporting on the new microchip credit cards issued to Americans recently. The new cards have a microchip that constantly rotates unique transaction codes that can’t be repeated. Instead of requiring a signature, the credit card will ask for a four-digit pin code to authenticate the transaction.

Merchants complain of the cost of upgrading to microchip readers. Naysayers that the counterfeit fraud it stops is not worth the trouble of conversion, warning that card-not-present online fraud will rise dramatically in its place.

Anyone arguing that magnetic strip cards that store personal information on the strip, making the card vulnerable to theft and fraud is the way to go in the 21st century should probably stick with cash payments, IOUs and wooden nickels.

If you’ve ever been victim to the chaos and indignation a lost or stolen magnetic strip credit card has caused, the claims that chip and pin microchip credit cards offer no additional protection are offensive.

I’ve been a victim of credit card fraud more than once. Unknowingly I dropped my credit card and in less than 24 hours, a man proceeded to use a woman’s Platinum American Express at establishments like Wal-Mart, Chuck-E-Cheese, Dollar Tree, gas stations and a local pizzeria. The pizzeria owner found it so suspicious, they took a phone camera image of the perpetrator. A man purchasing more than $250 in pizza with a woman’s credit card with a signature that did not match warranted a photograph, yet the pizzeria accepted the card anyways. And now they’re out $250. This would have all been improbable had a pin been required for the transactions.

If you’ve visited Europe, you will find that it’s common, even at restaurants, to pay with a microchip credit card where the server will hand you the device, you insert your card in the chip reader, approve the amount and enter your four-digit pin code for approval.

Statistics show that the microchip credit card technology works. Aite Group, an independent research and advisory firm focused on business, technology, and regulatory issues and their impact on the financial services industry has found that counterfeit credit card fraud has fallen 56 percent since microchip cards were issued in Britain in 2005. In Canada, fraud is down 49 percent. The remaining fraud happens across the border in countries without chip capability, like the US.

A microchip card is safer than magnetic strip because the chip creates a unique one-time transaction code. The transaction number is not usable again, preventing someone from duplicating the info. Fake microchip credit cards will be almost impossible, as well as unauthorized use of one without knowing the pin number.

As far as online fraud goes, its days are short-lived. Systems like Visa Token Service or Apple Pay work with the same microchip technology both in-store and online, by replacing the static credit card number with a temporary token that changes every time.

But for the technology to work, merchants need to be on board and stop being short-sighted. The cost of replacing standard swipe terminals with microchip readers is far less than the cost of losses from fraudulent credit card use. While chip readers aren’t mandatory yet, as of October 1, 2015, there is a “liability shift” where merchants and their processing companies will be liable for any counterfeit transactions.

Consumers could help push the industry towards safer technology in a couple of ways. By avoiding payment using older signature-based systems and selecting retailers in-store and online that use updated microchip cards or Apple Pay and Visa Token Service. As consumers demand security, merchants will follow, reducing fraud for all.