If you have a large number of credit cards, like I do, you probably received a barrage of new smart chip cards in the mail in recent months. And if you’re like me, you probably also wondered “wtf is up with all these chip cards and how do they benefit me?”.
Are you, am I, is anyone suddenly more awesome (or at least better off as consumers) with wallets full of microchip technology?
I did a little digging. Here’s what I found…
What are Smart Chip Cards?
Smart chip cards have had a lot of different names – chip credit cards, EMV cards, microchip cards, chip cards, chip and pin cards, chip and signature cards, and smart cards. They are all the same thing – a backwards compatible magnetic strip card that comes with a fancy new enhanced microchip security feature for point-of-purchase terminals that have the capability to read them.
How do you Use a Chip Credit Card?
It depends on the merchant and what type of card terminal they are using. With the shift to chip cards, merchants are slowly making the shift to chip reading enabled terminals at the point of sale. This transition is not cheap, and many merchants (particularly small businesses) are still behind. It’s been estimated that 65% of cards and 50% of merchant terminals will have been updated by the end of 2015.
How to use a chip card if a merchant has an updated chip-reading terminal:
- Enter your chip credit card (chip side first, with chip facing up) into the terminal.
- Leave the card in and follow the prompts to authorize the transaction.
How to use a chip card if a merchant does not have an updated chip-reading terminal:
- Use your chip card the same way you used previous magnetic strip credit cards, by swiping with the magnetic strip.
- Follow the prompts to authorize the transaction.
How to use a chip card online or over the phone:
Use the same entered payment information you used with previous magnetic strip cards.
So you Don’t Have to Use a Pin with a Chip Card?
Many other countries, who have had chip cards for a while now, have been using “chip and PIN” technology with these new cards. This means a 4 or 6 digit PIN is required for use. In the United States, most new cards won’t come with required PIN numbers, unless used for ATM’s. We’re starting with the alternative “chip and signature” method that I just highlighted for now.
Eventually, our cards could shift over to chip and PIN, but it will vary by issuer. Target is the first to make this transition.
What if I Travel to a Country that Requires Use of a Chip and PIN at Merchants?
Here’s a bit of irony. The PIN that you might have enabled for ATM use is not the same PIN that can be used at merchants. A “chip and signature” card cannot be used in that way. You will need a “chip and PIN” enabled card in order to use the card at a merchant that requires it.
What is the Benefit of Chip Cards?
Instead of using a magnetic strip, which can be skimmed by thieves for use on a cloned counterfeit card, the chip cards create a unique one time code for each transaction. Counterfeit cards cannot be created, so long as you are using the chip card strictly on terminals that are able to read the microchip (if you swipe the magnetic strip on a chip card – the enhanced security provided by the chip is irrelevant).
There have been a few high profile point-of-sale incidents, such as the huge Target credit card hack, which chip enabled cards and terminals should help to avoid.
However, only 37% of fraudulent transactions are from skimmed credit card counterfeits. The other 63% come from other means of fraud, including 45% from online transactions. And there’s still good ole’ fashion card theft (from a stolen wallet or purse or otherwise), which chip cards can’t help protect against.
The benefit of chip cards is really not for you, it’s for credit card providers as I’ll explain later on.
Do Chip Cards Protect Against Online or Phone Credit Card Transaction Fraud?
Chip-enabled cards do nothing to protect card not present (CNP) transactions, such as online, phone, or mail order. Fraud on these types of transactions now makes up more than half of all fraudulent transactions already. Chip cards are also still open to skimming fraud when used on magnetic strip terminals.
So while the new chip cards do provide an incremental improvement in fraud protection, they don’t solve credit card fraud entirely. And in some ways, they might encourage fraudsters to shift more to online fraud.
Chip Card Fraud Liability
The REAL reason credit card providers are shifting to chip cards is for liability reasons.
The shift to chip cards has allowed credit card providers to shift liability for counterfeit fraudulent transactions from them to the merchant, if that merchant does not have an updated terminal. Technically, whichever entity has the lesser technology is liable in the event of a hack (whereas right now only the card issuer is responsible).
Visa, Mastercard, Discover, and American Express all made this shift effective October 1, 2015 for all point-of-sale transactions. This is why you received the barrage of new chip cards in September (it wasn’t a government requirement as many had speculated). The liability shift for ATM and pay-at-the-pump transactions has yet to go into effect.
Does Any Liability Shift to Card Users with Chip Cards?
No. You are generally not responsible for the fraud that is committed on your card. The Fair Credit Billing Act caps the amount you can be charged for fraud, at $50. Most credit card providers will cover the $50 as well, however, because they want you to continue to use their card. If you have a chip card, use that method to pay. Don’t keep using the less secure magnetic strip swipe, unless that is your only option at the merchant’s terminal.
You may not be so lucky to have the $50 wiped out with a bank debit card, as I found when my debit card was stolen and used when traveling abroad. That’s one of the big reasons why I recommend going with credit cards vs. debit cards.
Is there Any Downside to Chip Cards?
If you’ve received a new card in place of an old one that you were using for automatic payments, odds are that the expiration date has been extended or your number or security code could have changed. This means that you will need to update your old card in order for automatic payments to continue, uninterrupted.