American credit card holders have long been used to swiping their cards to pay for purchases, with their data being read from the magnetic stripe on the card. But by next year, credit card issuers plan to roll out the computer-chip-based cards that the rest of the world uses for their credit card transactions.
The switch will be part of an effort to curb the fraudulent transactions and consumer data breaches that often occur from magnetic stripe cards.
The Aite Group, a financial research firm, reports that as much as 37% of credit card fraud in the United States is attributed to counterfeit magnetic stripe cards. Because those cards contain unchanging information, the data can be copied to other cards easily and used in fraudulent transactions.
The magnetic stripe card has been replaced by with a small integrated circuit embedded within the card in most other countries in the world. These are similar to the cards used in electronic voting machines in the U.S.
Those credit cards are referred to in other parts of the world as EMV cards, which take their name from the three financial companies that introduced this new standard — Europay, MasterCard, and Visa. The latter, Visa, is the most popular brand worldwide, accounting for roughly 52% of all payment volume globally.
The cards generate new data with each transaction, effectively making counterfeiting impossible. They are used the same as the magnetic stripe cards: they are inserted into the machine and require a customer signature or a PIN (personal identification number) in the case of debit cards.
The proposed change comes at a time when the payments industry is undergoing big changes. One major player, Apple Pay, has introduced convenient mobile payments in a way that doesn’t compete directly with existing credit card issuers, and which allows companies to keep their merchant fees.
MasterCard, Visa, Discover and American Express have established an Oct. 1, 2015 deadline to make the switch to EMV cards. At fuel pumps, however, the deadline for the switch won’t occur until 2017, due to the complexity of EMV compliance.
Once the deadline arrives, the liability for credit card fraud will shift to the least EMV-compliant party in the transaction. In many cases, this will be the merchant — if they haven’t switched their old PIN machines to new EMV card machines.