How Chip Cards Work
If you’ve spent any time overseas in the past decade or two, you would have noticed that all credit cards have little chips embedded into them. Also, instead of swiping credit cards horizontally on the side of a card reader when checking out, you place them into a slot on the front. This is EMV Technology (also known as smart cards or chip cards). Named after Europay, MasterCard and Visa, it is a global payment technology standard that uses a small microprocessor embedded in a credit card to transfer information from customer to business.
To help illustrate how chip cards work we’ve created a handy animated infographic. Now, next time you go to pay for something using your chip card, imagine all of the tiny coded conversations that are going on behind the scenes and rest assured that your data is being transferred securely.
This chip technology has actually been around since 1984, when French banks were first testing the technology, but it wasn’t until 1996 that the three major credit card companies came together to form EMVCo and publish the specifications for the technology.
Starting in October of 2015, the United States finally got to join the party thanks to a new shift in liability. Businesses who have not upgraded to new chip-enabled card readers are liable for any Visa, Discover or Mastercard transaction that is fraudulent if the card has the EMV chip.
The main reason for the switch is because of the recent credit card fraud attacks against major companies like Target, Goodwill, TJ Maxx, Neiman Marcus and Home Depot. In 2014, of the 17.6 million identity fraud victims in the U.S., 42% was credit card fraud related. To put this in perspective worldwide, 50% of credit card fraud occurs in the U.S., but only a quarter of credit card use comes from the U.S., according to United Press International.
The main difference between the magnetic stripes and chip cards is the added security of the chip. Magnetic stripes contain your sensitive data and it never changes. When you swipe your card, the card simply tells the machine your credit card number and expiration date. So, if someone were to hack the system, your data is easily replicable.
EMV chips, however, create a one-time code every time the card is used. Basically, your credit card and the card reader have a coded conversation and make sure that the card is actually yours before allowing the transaction to go through. Since the transaction numbers are never the same, if a hacker tried to use information taken from that transaction again, the transaction would be denied. Furthermore, chip cards can actually be programmed for extra security measures like declining foreign transactions, limits on offline transactions or disabling a card if it has been reported missing.
There are actually two kinds of chip transactions, using a chip card and then putting in your PIN, and using your chip card and signing (or chip-and-signature). The FBI actually issued a statement in favor of the use of PIN because it is more secure, but this is a highly debated topic among US merchants and banks.