Chip cards: What you need to know

What’s a chip card?

credit card with chipChances are good you’ve already seen and handled one. Chip credit cards have microprocessor chips embedded in the front of the card that look like a small, metallic square. These chips store information more securely and perform cryptographic processing during transactions, better protecting consumers and credit card issuers from financial liability for counterfeiting, lost or stolen cards.

These cards have been in the financial news lately because the four major U.S. card issuers — Visa, MasterCard, Discover and American Express — announced new rules to accelerate their adoption in October 2015. These incentives include audit relief, upgrading payment systems to support the transactions and fraud liability shifts.

Effective October 1, 2015, any card issuer or merchant that does not accept chip cards assumes liability for counterfeit point-of-sale card transactions for the four cards; and for lost or stolen card fraud for MasterCard, Discover and American Express cards.

Unlike magnetic stripe cards, chip cards create unique data for each transaction. This data cannot be used again. Traditional magnetic stripe cards, in comparison, carry static data that don’t change from one transaction to the next, making it far easier for criminals to steal the data and create transactions. For example, people can and have installed devices that skim card data at automated fuel pumps or ATMs.

Investing in chip card terminals makes sense for larger retailers, even with the current long wait for installation, testing and certification. But what if you are a small business with a relatively low card transaction volume?

Investing in the new equipment may be worthwhile if:

  • You sell electronics, computers, hobbies and games, music, pharmacy items, apparel, wire transfer and money orders. These industries have fraud rates five to 10 times higher than the overall merchant average. Fraud rates are far lower among doctors and dentists, religious organizations, dry cleaners, auto-body shops and lawn-and-garden stores
  • A significant portion of your sales is to strangers, making your business more vulnerable to counterfeiting, lost and stolen cards
  • Card payments are a significant percentage of your total sales.

If, however, your card transactions consist of more telephone orders or internet purchases, it may not be worth your while to invest in the new equipment. No existing technology can protect against someone reading a stolen card’s number and security code over the phone.

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