U.S. magnetic stripe credit cards on brink of extinction?
Looming ban on mag stripe cards may spell trouble for travelersWhile Europe and Canada are steadily moving ahead with widespread adoption of chip-and-PIN credit cards, U.S. magnetic stripe cards are being left behind in the dust.
The European Payments Council (EPC) recently announced it's considering a ban on magnetic stripe cards within the next couple of years, raising the question of when U.S. credit card merchants will make the switch. The EPC, established in 2002, is the governing body responsible for achieving a single payments market throughout Europe.
The challenge for U.S. merchants, say experts, lies primarily in the cost of making the transition. Chip-and-PIN cards use "smart card" technology and are processed using different terminals, or readers, than those used for magnetic stripe cards. Smart cards are embedded with a computer chip that communicates with a card reader using radio frequencies. At the point of sale, the cardholder also punches in a PIN. Without a PIN, the card is powerless.
Europe began the switch to chip-and-PIN cards back in 2004 largely because the cards are more effective in preventing fraud and offer protection against the use of cloned cards. According to the U.K. Payments Administration, growth in credit card fraud increased 14 percent from £535.3m (US$880 million) in 2007 to £609.9m (US$995 million) in 2008 (at today's currency exchange rate).
In the United States, fraud and identity theft cost consumers $48 billion in 2008, according to a report from Javelin Strategy and Research, but the increase from 2007 was only 7 percent.
In spite of a potential European ban on magnetic stripe cards, credit card issuers in the United States aren't rushing to make a change. "We'll continue to monitor the situation to see what develops," says Don Rhodes, director of risk management policy at the American Bankers Association.
Why the United States is taking its time
The reluctance to switch over to chip-and-PIN cards may be creating a perception that the United States is falling behind in credit card technology, but it's not that simple. One of the biggest reasons behind the delay is that because of some fundamental issues, converting to chip-and-PIN will be a more complex undertaking in the States than it was in Europe.
In Europe, card issuers have more control over the merchant card processing infrastructure. In the United States, however, issuers are separated from the payment processing system. American card issuers aren't in a position to force merchants to buy the new terminals required for processing chip-and-PIN cards. "Here in the United States, the banks can't just mandate that everyone has to switch to chip-and-PIN. Our payment system is too multilayered and complex," says Randy Vanderhoof, executive director of Smart Card Alliance.
Because of the way our payment system is set up, the cost of switching to chip-and-PIN cards would have a huge impact on merchants, who would have to bear the expense of purchasing new terminals to accommodate the cards. "Due to the costs involved, we're seeing some merchants push back against the idea of switching to the chip-and-PIN cards," says Rhodes.
Even with the costs, the switch made sense for Europe because chip-and-PIN promised a dramatic improvement in in preventing credit card fraud, says Vanderhoof. Europe's credit card system is basically offline, which means that when a customer buys a product, the transaction information isn't instantly updated. Verification of the data occurs at the end of the day when the transaction data is transmitted, so credit card fraud can't be detected at the point of sale.
The U.S. credit card system, however, is online. Our security systems follow consumer spending patterns, so fraud is often detected at the point of sale and a questionable card transaction can get flagged. "The reason that the U.S. is behind Europe in adopting smart cards is because fraud rates were significantly higher in Europe, since most merchant transactions were offline and it was impossible to detect fraud until after it happened. Since our payment system was online, we had built-in security features that caught fraud at an earlier stage," says Vanderhoof.
"Conditions are changing," admits Vanderhoof. "The timing is right to look at this again because of the increase in high profile attacks on the payments system and the tremendous investment merchants are required to make to achieve and maintain PCI compliance. These factors are prompting us to re-evaluate the cost of upgrading today compared to what was considered several years ago," says Vanderhoof.
Will Americans in Europe be out of luck?
But where does this leave Americans who are traveling to Europe with their magnetic stripe cards? Joe Weiss, an attorney who lives in Trenton, N.J., recently took a trip to France and was unable to use his magnetic stripe credit cards in some areas of the country. "About half of the places I went to in Alsace wouldn't accept my cards. I was told that they had no machine that could read my card. In Paris, though, more places had both types of machines."
According to Mark Bowerman, a spokesman for the U.K. Payments Administration, Weiss's situation should never have happened. The chip-and-PIN readers have the capability of processing the magnetic stripe cards. "All U.K. card-accepting merchants should have the ability to accept magnetic stripe cards, including ones from the United States, to accommodate visitors from overseas with non-chip-and-PIN cards. That's why we still have the magnetic stripe on our UK chip-and-PIN cards. So we can use them when we go overseas to countries that haven't yet introduced chip-and-PIN," says Bowerman.
So how did Weiss end up with so many problems? Bowerman says this is most likely the result of poor staff training. "The machine will tell the retailer to do what is necessary to read the magnetic stripe so the machine can print a receipt for signing by the customer," says Bowerman.
What if the person at the cash register says that they can't accept it? Bowerman suggests politely asking if the cashier wouldn't mind putting the card in the chip-and-PIN machine and then following the directions on the reader. If the clerk refuses to try, then ask to speak to the manager.
Travelers can relax a little, however, as Bowerman says, "we are not aware of any moves to withdraw stripe-reading chip-and-PIN machines from use." In fact, Visa and MasterCard are international and any retailer that accepts Visa or MasterCard has to have the ability to accept those cards, says Bowerman. "This is referred to as 'international interoperability.' So, even if there were mag-stripeless EMV cards in issue in Europe, a retailer would still have to accept Visa and MasterCard cards from those countries (e.g., the United States) that haven't issued chip cards."
Contactless cards: A step toward chip and PIN?
Magnetic stripe cards are considered contact cards. With a contact card, the vendor at the point of sale has to swipe it using a terminal in order for the data to be read. A contactless card has an embedded chip that only has to be held close to a reader. It differs from the chip-and-PIN, though, because no PIN is required. American Express, Visa and MasterCard all issue some contactless cards.
At this time, however, contactless cards don't solve the potential problem that Americans traveling abroad might face if the magnetic stripe cards ban is implemented. The chip-and-PIN cards comply with EMV Integrated Circuit Card Specifications, which is a set of global specifications for cards, terminals and applications intended for processing payments that involve smart card transactions. "The contactless smart cards we have in the United States don't meet the EMV specifications," says Smart Card Alliance's Vanderhoof. EMV is a standard developed by Europay, MasterCard and Visa (hence "EMV") to move toward compatible chip cards and terminals throughout the world.
While the contactless cards might be a step toward the chip and PIN, they currently don't solve the issue of the possible magnetic stripe ban. Experts predict that American credit card issuers might develop a chip-and-PIN card that's designed specifically for European travel. The banking industry agrees that this is a possible approach. "Creating a chip-and-PIN card for travelers is something that would be considered if using credit cards in Europe becomes a problem for Americans," says Rhodes.