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Chip-based credit cards will offer added security, but not too much

January 10, 2015

Chip-based credit cards will soon be introduced to the United States, similar to the ones they have in Europe and Canada, but apparently they will not offer the highest level of security possible. Critics have been quick to chastise banks for not going all out and making PINs a part of authenticating transactions.

Chip-based credit cards are coming to the United States, similar to the ones they have in Europe and Canada, but apparently they will not offer the highest level of security possible. Critics have been quick to chastise banks for not going all out and making PINs a part of authenticating transactions. 

Computer chips in 500 million new cards to hit the market
The Wall Street Journal reported that in 2015, J.P. Morgan Chase and Discover Financial Services will introduce more than 500 million new credit cards to the market. The cards will be embedded with computer chips – a technology that is already commonplace in Canada and Europe. The computer chips generate a unique code for transactions, making fraud and counterfeiting more difficult, however, requiring card owners to enter a PIN instead of a signature – to authenticate purchases – would make the cards even safer. 

Critics were quick to point out that requiring signatures to verify transactions, and not a secure PIN, does not make the cards as secure as they can be. The National Retail Federation recently tried to convince banks to make PINs necessary for transaction authentication. National Public radio reported this week that while banks upheld the new chips will protect against fraud, they ultimately failed to take one important step that could really make a big difference in card security.

“As anyone who’s traveled to Europe lately knows, using a credit card overseas usually requires entering a PIN just like you do with your bank card in the U.S.,” NPR said, according to the National Retail Federation. “Requiring PINs would make credit cards even safer – a lot safer, in fact. Bank industry officials brush aside this concern.”

The need for added security became evident after the mass data breaches that occurred last year at large retailers like Staples and Home Depot. Many critics also highlighted that the breaches would not have occurred at all if cards had been chip-based, the news source reported.

The data breaches last year drew attention to the topic of card security
The NRF pointed out that PINs are required to authenticate transactions for credit card processing in 80 countries around the world. The federation added that in requiring a signature instead of a PIN, banks are enabling half the security the cards are capable of providing. NRF Senior Vice President and General Counsel Mallory Duncan echoed these sentiments.

“It’s really disappointing to see that after all of the hacks that have occurred, the banks are only willing to take the steps that protect the banks and not the full protection we need,” said Duncan in an NPR report.

U.S. credit-card losses as the result of fraud were worth approximately $18 billion in 2013, reported The wall Street Journal, based on figures from Javelin Strategy & Research. While chip-based cards will reduce the chance that stolen credit cards will be used in fraud, it is strange that banks are not making PINs a requirement and placing security first.

The chip-based cards will require investment by retailers 
The Wall Street Journal indicated that merchants are currently scurrying to buy and install point-of-sale devices that can accept the new cards. One payment-industry group estimated that almost half of all U.S. merchants will be ready to accept the new cards by the end of 2015.  It is worthy to note that the new cards work with near field communication, similar to Apple Pay, but they also feature the traditional magnetic strip to accommodate merchants who have not yet upgraded their point-of-sale systems.

The NRF hinted that banks may be concerned consumers will be discouraged from using their credit cards because they are not accustomed to using PINs. Ironically, in October Pres. Barack Obama took the side of retailers and signed an executive order that required chips and PINs for credit cards issued to federal workers and for recipients of federal benefits like Social Security. Apparently, for banks, the president’s endorsement was not enough. Ultimately, the new chip-based cards are a step up over the traditional magnetic strip. Banks failing to make PINs necessary to authenticate transactions is odd, but it doesn’t have to be a doom and gloom story. 

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