Card 'swiping' becoming a thing of the past

New and replacement credit cards now come with an extra feature: a tiny computer chip embedded in the front of the card. This technological advance—available in Europe for a decade—is designed to prevent thieves from stealing information and making fake copies of cards. Instead of “swiping” the card through a slot that reads the magnetic stripe, users “dip” the cards for a few seconds into new card readers.

The rollout of the new readers has been gradual, with major credit card companies setting an Oct. 1 deadline for businesses and retailers to have the new readers up and running. Those businesses that don’t have them operational by now could now assume liability from banks for fraudulent losses.

The magnetic stripe on the back of a credit card holds information about the cardholder that is transferred digitally every time the card is swiped. It contains the cardholder’s full name, the primary account number, the card’s expiration date, and a country code. The big difference with the chip is that, when read, it generates a unique transaction number, which is forwarded to the cardholder’s bank. With a unique code for each transaction, there’s no way a merchant can link to an account number. This process is also called dynamic authentication and is similar to the “Apple Pay” technology Apple rolled out last year.

The new cards are inserted face up into the slot at the bottom of a payment terminal and held there until the screen says the transaction is approved. For most transactions less than $50, users don’t need to sign the digital pad.

Gas pumps and ATMs still use magnetic “swiping” technology. They have until October 2017 to change. According to The Washington Post, about 44 percent of merchants surveyed by Visa said they had chip readers installed as of July. Based on Europe’s experience with the transition to the technology, it could be as long as two or three years before even 70 percent of in-store transactions are done this way.

The new chip technology should cut down on face-to-face credit card fraud. The British switched to it in 2004, and by 2011, credit-card fraud had declined by 69 percent, according to credit card blog site Uni-Bul. In France, fraud losses between 2004 and 2009 dropped by more than 50 percent.

But according to the Post, many security experts expect credit-card fraud to move online, where thieves can still use card numbers and expiration dates to make fraudulent purchases. Europeans have seen that happening already.

Listen to Michael Cochrane’s report on credit-card chips on The World and Everything in It.