The switch to chip cards is working, six months later, U.S. consumers better protected against fraud

The U.S. financial services industry is the middle of a technology revolution, and if you’re like most Americans, you’re adjusting to dipping instead of swiping.  It’s the new world of credit cards – magnetic stripes are giving way to chips in cards, and it is changing the security of payments for good.

Six months ago, on October 1, 2015, the nation began the transition to more secure chip cards.  Shifting America’s more than 8 million merchants over to chip technology is an enormous task. In fact, it’s the largest change your wallet has seen in forty years. The U.S. is joining more than 80 countries around the world in upgrading payment card security to the chip standard. To give you some context, magnetic stripes utilize the same technology as cassette tapes, so in a way it’s like upgrading from cassettes to Spotify. More important, the chip card migration is addressing the single largest source of fraud in retail stores today. In 2015 alone, more than $6 billion of those electronic payments were fraudulent.

{mosads}The pace of adoption in the U.S. might seem slow, but consider the scale and complexity of the market. In just six months, nearly 600 million new chip cards – almost half the cards in circulation – have replaced magnetic stripe cards.  Nearly three-quarters of Americans report they already have at least one chip card.  And some one million merchant locations in the U.S. have upgraded to chip readers.  Three quarters of those merchants are small businesses. And this is without any mandate – legal or business – to upgrade.

Keep in mind the transition was expected to take at least five years – which is the time it took European nations to get to just 50% market penetration of chip transactions.

Speed and ease of use of electronic payments make them the single most popular way to pay at retail, with more than $5 trillion in payments processed in 2015 in the U.S.  The transition to chip cards now makes them more secure than ever because chip cards generate a unique security code with each transaction, unlike magnetic stripe cards that use the same code every time you swipe.

Unlike other national technology transformations, such as 2009’s digital TV migration requiring broadcasters to shut off analog transmissions, the chip card migration is neither mandatory nor government imposed.  No retailer is required to install chip readers, and no bank is required to issue new chip cards to their customers.  In order to protect those card issuers and retailers that do make the decision to upgrade, liability for counterfeit card fraud now falls on whichever party to the transaction (card issuing bank or retailer) failed to upgrade to chip technology.  If both bank and retailer have upgraded, the bank has liability.

As always, consumers, with or without a chip card, are 100% protected against card fraud liability.
Making the transition easier here in the U.S. than other countries is that chip cards outside the U.S.  include a mandatory PIN, but here in the U.S. PINs are optional.  About two-thirds of our nation’s merchants don’t have a customer-facing PIN pad, and so requiring mandatory PINs with all card transactions would mean cards couldn’t be used at restaurants and other retailers without PIN capability.

Why no mandatory PIN here?  We don’t need it to prevent counterfeit card fraud – the chip does that all by itself.
Before chip cards were launched in Europe a decade ago, a lack of telecom infrastructure meant merchants couldn’t verify card authenticity online.  So, chip cards in Europe needed to be verified offline. The way to authenticate a credit card offline is by using a PIN.

Here in the U.S., all card transactions are confirmed online, not offline as in Europe, so card transactions can be approved by banks online rather than by merchants offline.  And the chip card provides an additional layer of security by preventing card counterfeiting, thus addressing the most common form of in-store fraud.

Soon, all of us will break the magnetic stripe habit by dipping instead of swiping.  And the fact that chip card readers are compatible with mobile payments technology means that many of us will skip cards entirely and use their phones to pay.  But whichever the choice of technology, consumers and merchants will continue to enjoy the world’s safest, most secure, and most reliable payments systems.

Oxman is CEO, Electronic Transactions Association