If your credit card issuer has sent you a new card recently, you might have noticed an addition: a little computer chip on the front surface.
This computer chip is called an EMV chip, and it represents a technical standard being widely adopted in the wake of data breaches and the growth of fraudulent purchases. The EMV chip is sometimes called a “smart chip” and is used on “smart cards.” Until recently, they were mainly used in Europe, as well as in Canada, where chip technology has long been in use.
In the past, when traveling abroad, you might have had to request a chip card from your credit issuer. Now, most issuers are bringing out new cards with the chips. Pay attention because they are likely to become the standard — especially with new liability rules for merchants taking effect in October of 2015.
How Do EMV Chips Work?
When you swipe a “traditional” credit card with a magnetic stripe, the card reader takes the information stored on the stripe and uses it to complete the transaction. The data is exchanged using the connection the store has with the Internet, and it can be communicated with your card account. However, the data on a magnetic stripe doesn’t change. That’s why it’s so useful for fraudsters to use. Once someone gets that data (through a data breach or by some other means), it’s easy to duplicate using a fake card or some other means.
EMV chips are different. Your “smart card” contains a small computer chip that does the communicating with the merchant’s records and with your issuer. Each transaction comes with a unique code with an EMV transaction. This means that stealing the information from one specific transaction would make it useless for use in other transactions. To some degree, EMV chips can help protect against some forms of credit card fraud.
It’s important to understand, though, that your smart card isn’t immune from other types of fraud. Someone with your stolen credit card number and other information could still use it for fraudulent online purchases or other transactions. EMV chips mostly protect at the point-of-sale and prevent those types of data breaches from being as devastating.
When using a card with a chip, you are required to “dip” the card into the terminal. You might see a spot for your card in newer credit card readers at the store. Rather than a quick swipe, you might need to insert your card and wait for the transaction to be complete before removing it. For American consumers used to convenience, this step can seem burdensome and annoying. However, others around the world are used to it.
What About Contactless Payment?
Because we’re used to convenience, and because technology continues to move forward, many consumers are interested in contactless payments. Using near-field communication (NFC) technology, it’s possible to simply tap a terminal or wave your credit card in front of it in order to complete a transaction. The good news for the consumers that prize this type of convenience, to which the swipe has accustomed us, is that EMV technology is compatible with NFC technology.
There are chip makers who make sure that their EMV chips also incorporate NFC abilities. When you tap or wave your credit card in front of a terminal that can handle NFC, the communication takes place within the near-range communication field. There are usually additional measures in place, including unique digital signatures and separate protections, that make this type of transaction secure — and difficult to hack.
With contactless payment a part of EMV chip technology, it’s possible to retain the convenience we’re used to while increasing payment security. This becomes especially important if you want to turn your smartphone into a wallet. As the use of electronic payment through smartphone grows (and NFC technology is a big part of that), these precautions will be more important, and the magnetic stripes we’re used to will become relics of the past.
Merchant Compliance with EMV Technology
Of course, the downside to being an early adopter of technology is that it might be useless to you. One day, caught unexpectedly without my wallet, I tried to use the Apple Pay on my iPhone to make a purchase. Unfortunately, the retailer in question didn’t have the equipment necessary for the transaction. I had to put the item back and get it at a later time.
When it comes to reading EMV chips, many merchants don’t have much of a choice. Major payment processors are requiring chip technology by October 2015. Merchants can opt to not install terminals to read the chips, but they will then be held liable for fraudulent transactions. Right now, the payment processor or credit card issuer is absorbing the cost of fraud. With these changes, retailers will have to take the risks themselves. Issuers who equip their cards with EMV chips will have a case to make that they are working to prevent fraud, while merchants who refuse the technology will have to pay for fraudulent charges (federal law prevents consumers from being held responsible in most cases).
However, NFC capable terminals aren’t required at this time. The types of terminals equipped to handle EMV and NFC transactions are known as dual-interface terminals. They can be expensive, though. That means that, even though you might be able to use your smart card in a chip reader in the coming months, you might not be able to use your contactless payment method at the same terminal.
Some merchants, who realize that NFC is coming might be willing to go ahead and just pay the upfront cost now to equip their locations with dual-interface terminals. If they have to buy new terminals to accommodate EMV chips, it can make just as much sense for them to pay a little extra to get ahead of the curve on NFC.
What’s certain is that the way we pay for things continues to change. As we look for more convenience in our payment options, as well as increased security, the landscape will change and the old way of doing things will slowly disappear.