A person paying with a chipped credit card.

why are chipped credit cards safer

Saturday, December 20, 2014

Avoiding fraudulent transactions with EMV chip cards

Point of sale (POS) transactions are continuing to evolve, integrating new technologies and tools for safer exchange of credit card information that protects customers and businesses alike. One of the recent innovations is the adoption of chip technology.

Chipped credit cards work through the use of an embedded microchip along with a 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 the card holds the secure information of a cardholder. With the rise in counterfeit card creation and other types of hacker approaches, enhanced card security is now more important than ever.

History of credit cards

Magnetic Stripe Technology

Credit cards were first introduced in 1958 by Bank of America as a way to offer other forms of payment. The first iteration of credit cards included cards with a magnetic strip which is the black band on the back of every card that holds information about the account and cardholder. Credit card transactions took place with a swiping of the card through a POS system or payment terminal. However, even today, when only using a magnetic stripe card, account information can be easily stolen. As a result, other technologies have been explored to better protect card numbers and other card data from fraudsters. One of these technologies is chipped credit cards. Let’s next look at what chipped credit cards are.

Chipped Credit Cards

The most popular innovation has been the use of EMV chip cards. The name EMV comes from the three companies (Europay, Mastercard, Visa) that developed the global standard of using a computer chip during payment transactions. While the development of EMV cards, also called chipped credit cards, became more commonplace in the 1990s, the first patent for the use of a chip in various technologies took place in 1959. Card issuers began to implement chips into credit cards and debit cards that could be processed by chip card readers, either through insertion of the card or via contactless payment.

Adoption of EMV technology was rapid and quick in many regions of the world, especially Europe. The United States began to utilize chip technology when liability for fraud fell to retailers who hadn’t adopted the new type of card. Prior to this, liability was left to financial institutions. Since then, more companies have integrated the technology in their payment operations, replacing the older magstripe technology.

EMV credit cards generate a one-time code when used, encrypting sensitive information at the same time. Thus, EMV technology is able to provide extra layers of security from data breaches that older credit cards do not offer.

Is your chip credit card safe?

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. However, EMV cards have been able to make a dent in security threats, particularly related to counterfeit payment attempts. In fact, Visa has reported that counterfeit payment fraud losses have been reduced by over 80% through the use of chip cards. This is important for card issuer companies, especially knowing the costs that come with issuing new cards and covering costs related to compromised funds.

Some of the intrinsic aspects for safety with chip cards are outlined below.

  • Difficult to replicate or clone. With a magnetic stripe card, the data remains the same for every transaction. However, with a chip card, a unique code is created each time for the transaction. This protects the data and makes it hard to replicate for future use since the code is no longer valid with future transactions.
  • Advanced protection and encryption. Some chip cards operate with pin card technology where a pin number is entered during the transaction process for verification purposes. In addition to this, the actual chip is encrypted to protect the data. The data can be accessed only during the actual transaction and is then protected from future access.
  • Chip-and-signature vs. chip-and-PIN. Chip-and-PIN cards are becoming the gold standard for use to prevent issues with signature forgery. This type of chip card involves a customer using their card at a payment terminal, either through insertion or tapping for contactless payment methods. As the transaction processes, the customer is required to input a pin to complete the order. For online orders, this includes entering the card verification value (CVV or CV2) code that is listed on the back of the card. 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. Both types of chip cards are safer than magnetic stripe cards; however, the chip-and-PIN card is the best option for security purposes.
  • General fraud prevention. Another benefit of chip cards is their ability to prevent credit card fraud. Whether resulting from a large-scale data breach or individual identity theft, credit card issuers lose a significant amount of money when fraudulent activity takes place. With a chip card, your data is less likely to be stolen or accessed. However, it is important to remain diligent in other approaches to fraud prevention, including regularly checking your bank statements, using mobile payment technologies, and making online purchases on secure networks.
  • EMV chip technology protection levels. Whether using a PIN or other security code, chip cards offer multiple layers of protection during transaction processes. Ideally, retailers should also be mindful to check the identification and signature of the cardholder to enforce additional protection measures. Unlike older versions of credit cards, chip cards are able to better protect credit card numbers and the associated information from the cardholder so that fraudsters cannot duplicate the information and use it for their own use.

Chip card security risks

Even with increased security in the card, there are some aspects to risk that cannot be avoided with chip cards. For example, you are still vulnerable to a data breach, identity theft, or card use if your card is stolen. Even the highest level of security and technology development for cards can’t completely prevent data vulnerabilities in this type of hack or scam.

Moreover, with the growing use of contactless payments, your card information can still be acquired even if your card remains in your wallet. Some hackers use scanning devices (such as smartphones) to hijack information that is exchanged during transactions. This opportunity is made available through the development of near field communication (NFC) where communication can occur between two electronic devices within a short distance of one another. This vulnerability is especially significant for online shoppers. If a hacker has obtained your card number, the expiration date, or the security code on the back, it can still be misused.

The bottom line

Credit card fraud continues to be a major threat to customers, businesses, and card issuer organizations. However, newer technologies offer strategies to prevent the occurrence and impact of these threats. EMV technology offers a way to secure card data while continuing to support quick and easy transactions for customers.

Certainly, consumers should continue to be diligent in protecting their information and making sure they are as safe as possible with in-person or online transactions. Simultaneously, EMV technology and chip cards can provide additional layers of security for customers and retailers, preventing major losses from hackers or fraudsters over longer periods of time.

Next steps

Are you ready to prevent identity theft and avoid fraudulent transactions with enhanced card technology? Are you ready to learn about chip card safety benefits and other innovations from card companies? Are ready to amplify your understanding of chip readers, card security, and personal finance?

Heartland is ready to help.

Heartland helps nearly 1,000,000 entrepreneurs make and move money, manage employees and engage customers with human-centered technology solutions that allow them to rise above the daily grind and lead their businesses into a brighter future. Learn more at heartland.us.