An employee handing a woman her chip credit card back after payment.

How do chipped cards work?

Saturday, November 29, 2014

Understanding the future of electronic payments

Point of sale (POS) transactions are continuing to evolve, integrating new technologies and tools for a safer exchange of credit card information that protects customers and businesses alike. Global standards for credit card security consistently shift, especially as hackers gain strategies to steal credit card numbers or hack credit card reader systems.

Some of the recent innovations for card technology are the use of contactless payments as well as the adoption of chip technology. Chipped credit cards work through the use of an embedded microchip along with the magnetic stripe that is standard for checkout. Chip technology can function like a “smart card” with additional security to prevent fraudulent transactions. Similar to how data can be securely stored in a computer, a chip in a card holds the secure information of a cardholder.

This article will review the history of chipped cards, how transactions take place, and how financial institutions promote security through updated card features beyond magnetic stripe cards.

What is a chip card?

Chip card readers are becoming commonplace for many retailers. The shift in payment technology stems from the introduction of EMV cards which was initially introduced in 1996. The name EMV comes from the three companies (Europay, Mastercard, Visa) that developed the global standard of using a computer chip during payment transactions. In 2019, 97% of all card transactions in Europe included the use of EMV technology. However, the rate of use is a bit lower for transactions in the United States. In 2019, 63% of transactions utilized EMV cards. The slower adoption of EMV technology in the United States is largely due to existing measures in place to prevent the influence of fraudsters and general credit card fraud.

What are the types of chip cards?

There are two main chip cards for customers and businesses to be aware of. However, more recently, the chip-and-pin cards are becoming the gold standard for use as to prevent issues with signature forgery.

Chip-and-pin cards involve a customer using their card at a payment terminal, whether as a contactless payment or through inserting the debit card or credit card into a card reader. As the transaction processes, the customer is required to input a pin to complete the order. This differs slightly from chip-and-signature cards, where a customer inserts their card into a payment terminal and then signs the receipt to complete the transaction.

History of EMV chip cards

Global organizations recognized the need for increased card security after continuing to see trends in counterfeit card creation on a global scale. EMV chip cards offer a solution for increased security because when the card is used, the account information stored on the card is accessed but also encrypted at the same time. However, when using a magnetic stripe card, the account information can be more easily viewed or stolen. While the development became more commonplace in the 1990s, the first patent for the use of a chip in various technologies took place in 1959.

After the development and introduction of the technology in 1996, the actual roll-out and adoption of use began in 1998. As mentioned earlier, there was a delay in adoption from the United States, largely because fraud prevention approaches were primarily led by financial institutions. However, the United States began to utilize the technology when liability for fraud fell to retailers who hadn’t adopted the new type of card. Since then, more companies have integrated the technology in their payment operations, doing away with the older magstripe technology. Another cause for delay of implementation in the United States is the cost for infrastructure for EMV technology, an estimated $8 billion for American retailers or banks.

Magnetic stripe cards vs. chip credit cards

The primary difference between magnetic stripe cards and chipped credit cards is in how account information is stored and accessed. As discussed, the magnetic stripe holds sensitive account information that is accessed at any point of use. Magnetic stripe card transactions can go quicker; however, EMV cards provide an additional layer of security.

With a chip card, every transaction generates a unique code that ties to card data. Moreover, the unique code can only be used once, thereby protecting account data over longer periods of time. Also, instead of the card data and account information being held in the stripe, it is stored within a chip which is a higher level of protection. Ultimately, this prevents cardholders from having their data accessed during POS transactions.

Next, let’s look at how EMV chip card transactions are processed.

How are EMV chip card transactions processed?

EMV chip card transactions have a few important steps. These steps are outlined below:

  • Payment request. After items have been added and the total for customer payment has been calculated, the customer can present their EMV card at a payment terminal that works with EMV card payments. The card can either be inserted manually or placed near the terminal when using contactless cards.
  • Processing. The EMV terminal processes the unique code and transaction information through the chip. At this point, the transaction is authenticated.
  • Confirmation. The customer can confirm the amount for payment reflected on the terminal. Once approved, the customer inputs their PIN number (or at times, signs their signature) to confirm the payment transaction.
  • Completion. Once the terminal has been authorized, the credit card transaction is completed through real-time authorization with the card issuer or credit card company.

Now that we’ve discussed how EMV chip card transactions are processed, let’s next discuss security with EMV cards.

Understanding security with EMV cards

While security measures have greatly increased with the advent of new technology, there is no card authentication process or card technology that can guarantee fraud-proof payments — including EMV cards. If a thief takes your EMV card, it can still be used without theft detection, especially if the retailer doesn’t check signature matches on the card or identification information during the transaction. When considering digital purchases, if card data is stolen, then EMV payments don’t have the capability to stop the use of this information for fraudulent purchases.

However, EMV cards have made a huge dent in security threats, especially with counterfeit payment attempts. With the use of EMV cards, Visa has reported that counterfeit payment fraud losses have been reduced by over 80%. While that shows fraud can still happen, the use of chips in cards helps avoid use of cards from users who are not designated or have access to their card or account.

While building a security plan for your company, it is important to consider how EMV cards can be useful and helpful for your organization. In addition to integrating EMV card payments, it is also necessary to implement a security plan that has best practices for employees, other technologies, and relationships with your customer base.

Chipped cards and beyond

3.1 million merchants in the United States now utilize chip card payment systems — and that number is expected to grow as businesses aim to protect themselves from theft risks. Using a chipped card is an innovation that is likely to gain traction and add even more security benefits over time, especially as retailers prioritize secure payment platforms.

Whether your card is connected to Chase, Visa, Discover, or American Express, you will likely be issued EMV technology. Even with newer payment systems, such as Apple Pay, EMV technology has been used with contactless options where the device can communicate with digital terminals for payment, including the provision of token and other key information.

Next steps

Are you ready to explore chipped cards and their impact on your business operations? Are you ready to embrace the most innovative aspects of card technology?

Heartland is ready to help.

Heartland is the point of sale, payments and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind. Learn more at heartland.us.