How chip cards work and what an EMV transaction looks like
The future of electronic payments is changing. Credit card issuers and merchants are working together to provide new ways to combat fraud, and chip and PIN technology is one of the most important developments to come along in years.
Chip card technology, also known as EMV, helps reduce the risk of fraud during card-present transactions. Adopted years ago in Europe and Canada, the U.S. is the last major economy in the world to make the transition. Beginning on October 1, 2015, merchants who have not adopted chip card technology will face increased liability for certain payment card fraud that could have been prevented with chip card technology.
While most merchants have heard of chip cards and have a general sense of how they work, many people do not understand how this system changes the transaction process for both store personnel and customers.
How chip cards work and offer security protectionsChip cards offer a number of protections that standard magnetic stripe cards lack. Chip cards generate a unique code with every transaction, so even if a hacker manages to steal the authentication code, it will be useless for future transactions. In addition, the embedded microchip makes duplicating cards for counterfeit purposes nearly impossible.
Another benefit is that the cardholder can retain possession of the card throughout the transaction. There is no opportunity for unscrupulous employees to pass the card through a skimmer that records personal data.
How chip card transactions are processedChip cards are read by a new type of credit card terminal that features the latest in card and transaction authentication. During a transaction, the customer inserts the payment card into the terminal, chip-end first. The chip and the card reader “talk” back and forth through dynamic speech to authenticate the transaction. Magnetic stripe cards, by contrast, simply “tell” the card number and expiration date to the card reader. This is why data from magnetic cards is easily stolen and reproduced into counterfeit cards.
After inserting the card, the customer follows on-screen instructions that further validate the transaction. This process will vary depending on which type of verification method the card-issuing bank chooses. Some issuers use a chip-and-signature system where patrons sign a printed receipt like they always have. Others will require the customer to enter a PIN to complete the transaction, just as they would with a debit card purchase or ATM withdrawal.