By now you have probably received new credit cards that feature improved capability to combat fraud. These cards incorporate a very thin microprocessor that is intended to replace the magnetic stripe with which are so familiar. And while the United States is behind the curve in adopting the more secure chip technology, merchants are increasingly adopting it in response to an impending shift in liability for fraudulent activity.
Photo — Please put this mug shot of Chris Hopkins of Barnett & Co. in our system to use every other Wednesday when it will run with his column.The incorporation of computer chips into credit cards is hardly new and is de rigeur in the rest of the world. The technology, known as EMV for Europay, Mastercard and Visa, has become the standard for most transactions outside the U.S. American card issuers have been reluctant to adopt the methodology because of the marginal cost of embedding a computer chip onto millions of credit cards, while merchants have balked at the expense of replacing point-of-sale terminals to enable the technology. Thanks to the recent spate of data breaches at major American retailers, the logjam appears to have broken. Industry estimates suggest that half of all fraudulent charges occur in the U.S., so the card industry is finally reacting. Oct. 1 was a major milestone.
Although there has been no legislation mandating enhanced security including EMV technology, card issuers are moving the ball down the field. Several payment processors including Visa and Mastercard notified merchants that effective Oct. 1, 2015, liability for fraudulent charges may shift away from the card issuers to the retailers unless the merchants upgrade to EMV terminals. Businesses may continue to process magnetic-striped credit cards, but must eat any losses arising from accepting stolen cards that carry the chip. This is proving to be a powerful incentive to upgrade to the newer technology.
Adoption of EMV is proving somewhat more complex for ATM cards, and as of yet the road to adoption of chip technology is unclear. Also, terminals at gas pumps will be exempted from the EMV requirement until 2017.
The imperative for adopting the EMV cards derives from the extra layers of security inherent in this type of payment system over the 30-year old magnetic stripe technology. Every individual transaction initiated with a chip card utilizes so-called dynamic security. Each time the card is inserted into the reader (a process called "dipping" the card), a unique ID code is generated to validate the transaction. Thus it is much more difficult to counterfeit an EMV card successfully.
As already occurs in other countries, American shoppers will eventually be required to go one step further and enter a PIN number as well, adding an additional layer of security to the transaction. Some vendors, like restaurants, will ultimately have to adopt portable card readers that are brought to the table. In this event, your card will never leave your sight and in fact never be handled by anyone else.
One inevitable drawback of the new EMV card technology is the additional time required to complete each transaction. Chip cards must be inserted (dipped) into the card reader and left in place until the computer exchanges data with the chip. Premature extraction of the card requires that the process be restarted, and the additional time required will cause delays in the checkout line.
Other interesting alternatives are gaining traction, including mobile payment apps available on several smartphones including Apple, Samsung and a variety of Android devices. Those technologies also promise greater security and are generally faster than the EMV chip process.
So get ready. Be prepared to embrace change in the way you pay for purchases. But be assured that your transactions will be more secure and less susceptible to fraud.
Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co. in Chattanooga.