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Why is There a Chip in My Card?

Silhouette of a hand pick-pocketing a credit card

As American consumers familiarize themselves with their new credit cards, many still don't understand the benefits their new chip-embedded EMV card offers over the antiquated magnetic stripe cards we used for so long.

Personally, I was probably happier than most to see the EMV card adoption begin. As an economic crimes detective, I get a front row seat to the impact of credit card fraud on the financial and economic system. In 2015, research issued by BarclaysPLC revealed that the United States accounted for 47% of worldwide credit card fraud even though only 24% of the world's card volume is processed domestically. Virtually all experts agree that America's reluctance to adopt the EMV standard is the driver for our high rates of fraud.

Silhouette of a hand pick-pocketing a credit card

Image source: Pixabay

After creating a counterfeit card, all a thief needs to do is walk into a retail location -- basically any store -- and confidently hand a merchant the forged card and pay for the selected merchandise. If they encounter a vigilant clerk who demands identification before the purchase is authorized, the fraudster can just hand them their own valid state-issued driver's license or identification card to show the clerk that the name on the front of the credit card does indeed match the identification the crook produced. Because, again, your real name is only embedded on the magnetic stripe on the back, invisible to a visual inspection, while the fraudster's name has been printed or embossed on the front of the counterfeit card for the world to see.

The EMV chip's dynamic and encrypted data prevents counterfeiting

Now compare how thesemagnetic stripes work with what the EMV chips do when they are inserted into the newer terminals. While most of the information the new cards transmit is the same, there is one key addition to the data being read: encrypted keys inside the chip create a dynamic code that is unique to each transaction.

If a card with an EMV chip is skimmed or a database with the card's information is breached, crooks cannot just produce a counterfeit with the static information on the magnetic stripe. Because the code generated by the chip is unique for each purchase, there is no way for fraudsters to reproduce the encrypted code.

No silver bullet, just another important tool

Banks and other card issuers long ago decided to consider the losses in these cases as just the cost of doing business. After a card issuer reimburses their card holder, it technically becomes the victim of fraud (though the consumer might still be the victim of identity theft). Card issuers rarely even pursue charges unless monetary losses begin to approach five digits.

The use of counterfeit credit cards made up 37% of all credit card fraud in the United States as recently as 2014. As EMV cards become more widely adopted and more merchants update their terminals, this percentage will drop. If the pattern holds from what happened in other countries once EMV chip-embedded cards were adopted, fraud will shift toward card-not-present transactions. The EMV system is no silver bullet to stop all fraud, but it is another tool in our tool box that we can use to curb fraudulent point-of-sale transactions.

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Matthew Cochrane owns shares of Mastercard. The Motley Fool owns shares of and recommends Mastercard and Visa. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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