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Credit card transition takes aim at fraud

July 17, 2015

Many Americans receiving new credit cards from their banks these days have noticed a new feature on them -- a small microchip, which now appears on the left front side. After two decades of use in other countries, the microchip will finally become a common sight on payment cards in the United States. These chip cards, or EMV cards, will upgrade the basic magnetic stripe technology used to make point-of-sale (POS) purchases.

EMV stands for “Europay, MasterCard and Visa,” the three credit card companies that jointly standardized and implemented the use of the integrated chip, or “smart” card. A chip card contains a computer chip that can be read by a POS card reader. The smart chip cards were first introduced in 1994 and were soon adopted by most of the world because they helped to increase the security of the financial system. The adoption of EMV has effectively reduced credit card fraud where it has been implemented, usually resulting in a substantial decrease in this crime. Conversely, the U.S. accounts for about half of all global credit card fraud annually, though only 27 percent of the world’s credit card transactions occur here. Except for the United States, all other G20 (advanced-economy) nations have adopted the EMV credit system.

Why the change now? Most other markets have made the transition, and the industry determined that it was time to move the U.S. market to a safer system.  To do so, the industry has agreed to shift liability from banks to merchants starting on Oct. 1 of this year.  Merchants and banks in the U.S are not legally required to adopt EMV technology for their point-of-sale systems. However, on Oct. 1, the liability for fraud shifts to them for customer transactions involving EMV cards if magnetic-strip POS systems are still being used.

The EMV conversion process is already well underway for U.S. credit cardholders. About 120 million chip cards were issued nationally by the end of 2014, according to the Smart Card Alliance. Banks will continue to issue credit customers new chip cards throughout this year, totaling about 600 million cards by year’s end. New terminals are also emerging in many retail stores, taxi cabs, merchants and more.

So it’s important to familiarize oneself with the EMV technology, as it may result in some initial confusion without the proper guidance.

EMV cards are made in two ways, chip-and-PIN (personal identification number) and chip-and-signature, both methods that are already familiar to American consumers. Cardholders initially insert the card in a POS device to initiate the process and then follow the directions.  They will no longer swipe a card through the machine. This way, the chip will activate and exchange information with the terminal securely via a cryptogram. What this means is that every purchase can be isolated from any other purchase using that EMV card because every purchase contains a new, unique cryptogram.

An additional fraud-prevention method that is being used by new systems involves tokenization. This procedure adds a layer of protection by providing a “token,” a one-time substitute identification, for the static information on a card like the printed credit card number or the expiration date. Tokenization can prevent exploiting cross-channel contamination, such as obtaining information from a fraudulent internet transaction and using it in a POS device.

Combined use of these technologies show that fraud will decline at the point of sale device, but use of a chip card won’t be able to eliminate fraud completely.  History shows that fraud will emerge through other channels, like “card not present” purchases or those that are computer-based.  Companies should be aware of the EMV transition, what it means for them and should consider multiple methods to maintain customer satisfaction while securing purchase pathways.