In the near future, most consumers in the US will be receiving a new credit card meant to replace the older ones. Europe has been using newly designed cards containing card-chip technology effectively for years and the US is just now catching up. The US currently sees about half of the credit card fraud in the world and the new card-chip technology reportedly reduces fraud by more than 70%.
What was wrong with the older cards?
It may surprise you when your financial institution sends you a new card before your old card has expired. But in the next few months the shift is expected to occur. Those who open new accounts will receive the technologically advanced cards equipped with micro-chips. Older cards used a magnetic strip to store and transfer credit card information. The problem is that it is very easy to copy the information on a magnetic strip. This made it easy for criminally minded people to reproduce counterfeit cards to be used in retail settings. The new chip technology has a built-in authentication feature which helps combat counterfeit and fraudulent activities.
The Coming Shift in Liability with Fraudulent Transactions
With the new card there will be a shift in liability, or in who is responsible for paying when fraudulent card activities occur. Presently, the card issuer takes care of these types of losses. After October 1, the liability can shift between the merchant or the card issuer and whoever is not using the new technology will be the party liable for any fraudulent transactions. By 2017, this policy is going to expand to include ATMs and fuel dispensers used at gasoline stations.
An example would be if a counterfeit card is used to purchase a $200 pair of shoes but the store had failed to update their equipment or terminals, the store will be the liable party and take the loss. However, if the company that issues the card had not updated the consumer’s card and the fraud happened on an account bearing the mag-stripe, the issuer would be the party to cover the associated costs.
October 1, 2015 is the current timeline for this liability shift. It’s not a deadline, per se, but it is an extra incentive for companies to get their readers and cards switched over and help reduce counterfeit card fraud. It is understandable that this new technology may not completely eliminate fraudulent credit card activity, but it is expected to significantly reduce the total number of these types of fraudulent transactions.
Who instigated this change?
The primary parties in these changes are payment processing companies and banks. Banks are on board because they want a more secure way to make payments and previously they are the ones to take care of the losses when fraud occurs on their cards. Banks originally relied on their own data and software from payment networks to detect and catch fraudulent activities at the point of sale. But more security was necessary since even the smaller banks were having to pay out of pocket when covering fraudulent activity on their customer’s cards. In 2012, the American Bankers Association gave an estimate of about $1.74 billion that was lost due to fraud just that year. With the switchover which will occur on October 1, banks will not be liable but merchants who have not upgraded and continue to use the magnetic stripped cards will have to pay for any fraudulent activity that occurs in their stores.
Transactions will not be handled the same way and you are less likely to be swiping your card. It is important to note that even after the October shift, many merchants will have both options available to consumers who can choose to use the chip technology or the traditional magnetic strip. This is to help with the transition. New card readers are going to request that users ‘dip” their cards instead of swiping. This is going to take a little longer to process than the magnetic stripe did. Presently you probably swipe your card quickly or you have to do it again. The new cards will take a few seconds to complete the transaction because the card and the terminal will engage in an electronic conversation. Not only will the card and terminal exchange data, they will create new data. The card reader will generate a unique code for each individual transaction and then use it in place of your card number. This is one spot where safety becomes stricter. IF someone tries to hack the store’s records, as has occurred in the past with some major retailers, there will be a signal because you can’t “re-use” a distinct transaction number. The fraudulent transactions would not go through.
Is card information safe now?
Once the new technology has been adapted and is widely in use, it is not a guarantee that there will not be a major data breech like happened with Target in 2013. However, it is definitely a huge step in the right direction when it comes to dealing with credit card fraud. The transaction between the card and the terminal is encrypted which offers additional security measures. There is no way to eliminate credit card fraud altogether, but as companies work to move forward in the fight it will become easier for consumers and merchants to win and more difficult for thieves to commit criminal activities.