New Credit Cards are Coming

For something a little different -

After years of use in other countries around the world, chip-enabled credit cards are coming to the USA. Credit cards with only magnetic strips are being phased out ahead of an October 1, 2015 deadline.

If you have a credit card, you’ll probably get a replacement with a chip at some point soon if you have not already. The entire country won’t switch to chip cards by October 1, but retailers and banks that don’t will assume more financial liability.

How to Use a Chip Card

To use a chip-enabled credit card, you insert it in the bottom of a payment terminal and leave it there for the duration of the transaction. Importantly, the card needs to remain in the reader until the transaction finishes, not swiped like a magnetic strip.

While you’ll encounter payment terminals with support for both the magnetic strip and chip on modern credit cards, you can’t necessarily just use the magnetic strip. Try to swipe a chip-enabled card on such terminals and you’ll probably be asked to insert the card and pay via the chip method.

EMV Card Basics

Credit cards with chips use the EMV standard, which stands for “Europay, Mastercard, and Visa.” EMV is a global standard allowing chip cards to interoperate at point-of-sale systems and automated banking machines. (Despite the name, American Express and Discover are also participating.)

Know that the old magnetic strip isn’t going anywhere anytime soon. A chip-enabled credit card has an EMV chip as well as a magnetic strip. If you ever find yourself somewhere that only accepts magnetic strips — either in the USA or elsewhere in the world — you’ll still be able to use your card.

The magnetic strip can easily be cloned by swiping it, and that magnetic strip data can be copied to another card and used to make fraudulent purchases. A chip card works differently — it has a small computer chip in it. When the chip card is inserted into a payment terminal, it creates a one-time transaction code that can only be used once. In other words, chips can’t be duplicated as easily as magnetic strips. Any payment details would be stored with the one-time code. If the USA had transitioned to chip cards earlier, the disastrous Target breach could have likely been averted.

The October 1 Liability Shift

US banks have been issuing chip cards over the past year ahead of an October 1, 2015 deadline. After this date, a “liability shift” will take place. Any retailers that choose to accept payments made via a chip card’s magnetic strip can continue doing so, but they’ll accept liability for any fraudulent purchases. Any credit card issuers that don’t issue EMV credit cards will be on the hook for any fraudulent purchases, too.

In effect, Visa and Mastercard are telling banks and retailers that they can continue using the old system at their own financial risk. Not everyone will be transitioned over by October 1, but everyone who hasn’t will assume additional liability — that will encourage them to migrate as soon as possible.

This doesn’t affect your own personal liability — if your bank doesn’t issue you a credit card with a PIN before October 1, they’re assuming liability. That’s their problem, not yours. These details are all between retailers, banks, Visa, and Mastercard. But they explain why chip cards are getting rolled out so quickly.

EMV Cards Don’t Eliminate Fraud

Chip cards don’t eliminate the problem of fraud. In particular, these cards still have numbers, expiry dates, and three-digit codes on their backs. Someone could copy this information and use it to make purchases online. A chip-and-signature card could be used at a point-of-sale terminal along with a forged signature. The magnetic strip can still be used in the old way at many terminals around the world.

But, although chip cards won’t eliminate all fraud, they will make fraud more difficult. This will also help prevent future breaches of payment systems — like the one that happened at Target — from being so damaging.