Credit Card Chips and the Ongoing Battle to Combat Fraud: EMV Cost Affecting Retailer Adoption
According to a report from Javelin Strategy & Research, losses from credit card fraud in the U.S. topped $8 billion last year. These skyrocketing losses prompted a new EMV (Europay, MasterCard and Visa) global standard. This standard recommends equipping credit cards with computer chips that create a unique code for each transaction. As such, it prevents thieves from “skimming” information, to which traditional magnetic stripe cards are susceptible.
Instead of swiping cards, consumers can either “dip” their EMV cards into a terminal slot or tap them against a scanner. There are two types of EMV cards: the chip-and-signature card, which is predominantly in the U.S.; and the chip-and-pin card (considered a higher level of security), which is more widespread in Europe.
The EMV card is not 100% secure, though, as it won’t protect online purchases; and if the chip-and-signature card is stolen, it's still vulnerable to fraud. However, when the U.K. switched to the EMV standard in 2005, counterfeit fraud decreased by 63%.
The new standard is voluntary, and retailers can still accept payments with the magnetic stripe cards. However, major U.S. credit card issuers MasterCard, Visa, Discover and American Express established a deadline that took effect last year. Since then, retailers that had not upgraded to EMV systems became liable for fraudulent transactions if the card was EMV-equipped. If there is fraud when a magnetic stripe card is used, the bank is still responsible for the fraud.
A flaw recently came to light where it may be possible for hackers to rewrite the card’s magnetic stripe code to make it appear to be a chipless card. This would allow them to gain access to and counterfeit cards. To combat this, retailers can encrypt transactions. There would be a cost to retailers for this added feature, however, when they upgrade their credit card machines. Basic EMV card processors can cost upwards of $1,000 per unit.
While many mass retailers, such as Walmart, Target and Costco, have upgraded their card terminals, most U.S. retailers are not set up to accept EMV cards. Approximately 70% of U.S. cardholders currently own at least one EMV card. Now the retailers just have to catch up to consumers and the card-issuing banks.