how-emv-chip-pin-rfid-credit-cards-work-europe-usa

If you've recently traveled to Europe, or if you live in a popular tourist area in the United States, you may have noticed a new kind of credit card terminal at checkout counters. These devices combine the familiar magnetic stripe reader with up to two new sensors: a slot for credit cards with exposed "EMV chips," and a pad for "tap and go" payments. For the past few years, Europe has been the testing ground for new credit card technology that could eventually render your current credit card obsolete.

Deciphering the new credit card lingo

The acronym EMV comes from the trio of processing networks that spearheaded the technology's development: EuroPay, MasterCard and Visa. (MasterCard acquired EuroPay in 2002.) Since the mid-1990s, EMV has grown into a global standard that accounts for the majority of the world's credit card and debit card transactions, with the United States the primary holdout.

The traditional credit card still widely used in America has a magnetic stripe on the back that contains a weakly encoded version of a cardholder's credit card number. These cards are read by swiping the magnetic stripe through a card reader. By contrast, under the EMV standard, credit card data is read from a microchip embedded in the card. The microchip provides a "tokenized" validation code instead of raw account details.

Older EMV merchant terminals require that a credit card with a contact chip (a metallic pad on the surface of the card) be inserted into a compatible card reader. By adapting the core EMV standard, it's no longer necessary to swipe the card. Instead, contactless credit cards let you tap or wave your chip-enabled card near a payment pad, instead of swiping or inserting it. The payment pad transmits a radio signal that activates the chip. A further enhancement to the contactless card uses a technology called radio frequency identification, or RFID, to transmit card data to a passive reader.

Depending on the circumstances, merchants can use one of three methods to validate the cardholder's identity:

  • Chip and PIN. European credit card issuers require cardholders to memorize and key in a PIN for both credit card and debit card transactions.
  • Chip and signature. More common in America, a merchant terminal validates cardholder identity using a signature instead of a PIN.
  • Chip and no signature. For small purchases, American merchants can choose to waive the signature requirement altogether by relying solely on the EMV chip's validation.

Recent advances in near field communication (NFC) technology enable some wireless phones to mimic the signal emitted when a merchant terminal accesses the EMV chip, allowing transactions to be completed without using a physical credit card.

While Europe uses PIN, U.S. looks further ahead

In 2005, European rules left merchants responsible for the costs of any unverified transaction, making "chip and PIN" the preferred standard throughout the EU. At their discretion, retailers could choose to still accept magnetic stripe credit cards, especially in destinations popular among American tourists and business travelers. But after becoming the routine target for credit card fraud, even those holdout merchants have found themselves switching to exclusive chip-and-PIN transactions.

In his book "Rick Steves' Europe Through the Back Door," travel author and public television host Rick Steves advised Americans in Europe to carry a contact-chip-enabled prepaid debit card as a backup for when merchants won't accept magnetic-stripe credit cards. United Nations Federal Credit Union launched the first U.S.-based EMV card with a European-style contact chip in 2010. Chase, Wells Fargo and Citibank now issue similar cards to elite customers upon request.

Meanwhile, American merchants and consumers have largely rejected "chip and PIN." According to the American Bankers Association, only 25 percent of American merchants accept PIN-based transactions, citing customer inconvenience and equipment fees as reasons to shun "chip and PIN."

The majority of U.S. merchants take advantage of the fact that most American banks enable debit cards to be "run as credit" at the checkout counter or for online, phone and mail order purchases. Rather than requiring PINs, American credit card processors and issuers have beefed up their fraud prevention and detection programs.

The future of EMV in the U.S.

EMV has already hit the streets in the U.S. Over the coming years, Visa and the other major credit card payment processors plan to make EMV essential for payment security and fraud prevention, despite their lack of a PIN requirement. Expect major banks and brands to sell you on contactless EMV cards based on their convenience:

  • MasterCard calls their EMV implementation "PayPass." As a partner in Google Wallet, MasterCard made some of the year's biggest announcements regarding merchant EMV adoption for both contactless credit cards and mobile payment solutions.
  • Visa markets their version of contactless EMV as "PayWave." The company has used convention halls and rock festivals to experiment with additional uses of EMV chips for guest access and loyalty programs.
  • American Express first tested smart card technology with the launch of its Blue Card, but has since rolled out contactless EMV under the "Express Pay" brand. According to published terms and conditions, merchants may qualify for full protection against fraudulent transactions if they consistently use EMV readers and other best practices to deter thieves.
  • Discover experimented with a keychain-ready version of its credit card, branded Discover2Go. The card issuer and payment network abandoned that initiative in favor of an EMV-compliant RFID sticker that cardholders can attach to phones or key fobs.

Your next credit card may very well be the first one in your wallet to not lose its pristine finish from repeated swiping through card readers coated with the detritus of who knows how many other people's wallets.

About the Author

arnold

Curtis Arnold, a nationally recognized consumer educator and advocate, has been educating consumers about credit cards since 1998. New! Curtis is the author of 'How You Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line' (FT Press, 2008). He is also the co-author of the upcoming Complete Idiot's Guide to Person-to-Person Lending (Alpha Books/Pengiun Group USA, April 2009), a contribitor to The Ultimate Allowance (InnerWealth Publishing, 2008) and is extensively featured in 42 RulesTM for Driving Success With Books (Super Star Press, January 2009).