How do credit card chips work Is not an odd question for anyone to ask because the mechanism behind it can be confusing, especially for those that are not very tech savvy.
This confusion we will try to eliminate in the course of the article. But before then let’s see what we had before cards and chips.
Before the advent of cash, we had cowries, silver coins, and gold bars as a means of exchange. However, methods of payment have changed and will continue to evolve as technology continues to get more sophisticated.
Today we can talk of card and cardless payment as means of payment all thanks to technological innovations. With card payment, there are different types and this article will be looking at specifically at chip and pin credit cards and how they work.
What Is a Chip Card?
A chip card is a plastic debit or credit card that is standard size and has both a conventional magnetic stripe and an implanted microprocessor. To improve data security when doing transactions at terminals, businesses, or automated teller machines (ATMs), the chip encrypts data. Chip cards are sometimes referred to as smart cards, Europay, Mastercard, and Visa (EMV) cards, chip-and-PIN cards, and chip-and-signature cards.
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How Chip Cards Work
Plastic has long served as a convenient and secure payment method, offering advantages over cash transactions. The evolution of payment cards began in the 1950s with the introduction of credit cards featuring revolving credit, while debit cards emerged in the late 1960s. Initially, crucial account details like credit limits and available balances were stored in the magnetic stripe on the card’s back.
The global standard for debit and credit transactions shifted with the advent of chip cards, also known as EMV cards, pioneered by Europay, Mastercard, and Visa. These cards feature a small silver or gold microchip on the front, containing account information. Originating in Europe, chip card technology gained worldwide acceptance, officially reaching the United States in October 2015.
When using a chip card, the cardholder inserts it into a chip-enabled terminal, such as an ATM or point-of-sale (POS) terminal. The terminal then transmits the cardholder’s information to the merchant or card provider. Approval hinges on the account balance supporting the transaction, with rejection occurring if insufficient funds are available. Some terminals may necessitate additional security measures, such as a personal identification number (PIN) or a signature.
While chip technology doesn’t prevent data breaches, it may mitigate certain types of fraud resulting from such breaches. The chip’s enhanced security features include measures to counteract counterfeiting, adding an extra layer of protection to card transactions.
Types of Chip Cards
To complete a transaction in the US, a cardholder often only has to insert their chip card into a machine. However, in other situations—including abroad—users of the following cards might need to take extra procedures to complete a transaction or get cash out of the ATM.
Chip-and-signature cards
The conventional magnetic stripe is not as secure as a chip-and-signature card. The cardholder transmits data from the terminal to the financial institution using the chip rather than the stripe. The customer’s signature is required to finalize the transaction, even if it is approved.
Chip-and-PIN cards
Customers can feel the safest with these cards. They function similarly to a standard chip card but additionally demand a PIN to finish a transaction. To use a credit or debit card to make a transaction or withdraw cash from the ATM, a customer must input their personal identification number.
In the US, PINs are frequently required when using debit and credit cards to make ATM withdrawals. Regardless of where or how they use their cards, consumers in Canada and other nations must use their PINs, even when using credit cards.
Benefits of Chip Cards
The utilization of chip card technology at chip-enabled terminals adds an extra layer of security, making the cards more resistant to skimming. This encryption security complements the existing fraud prevention monitoring provided by card issuers.
Typically, customers are covered for fraudulent usage in most cases, limiting their liability in the event of theft. While embedded chips contribute to preventing card-present fraud, additional safeguards are necessary to address card-not-present fraud.
When used at chip-enabled terminals, the chip encrypts information, enhancing transaction security. However, it’s important to note that chip card technology doesn’t serve as a locator system, meaning lost cards cannot be tracked using such services.
In the event of loss, users need to request a replacement card from their provider. Until engaged in a reader, the chip cannot detect its location for security or advertising purposes, focusing solely on authenticating card data during purchases. Fortunately, these cards are generally easily replaceable in cases of loss or damage.
Banks closely monitor chip card activity, taking into account factors such as location use, purchase amounts, and the merchant charging the account. If any suspicious activity is identified, the card issuer will make efforts to contact the customer. Following verification of fraudulent charges, the bank issues a credit to the chip card account as a remedy.
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Magnetic strip vs. chip credit cards
The issue with magnetic strip credit cards is that they have all the cardholder data that thieves need to make fake cards and make purchases using your cards. Even inexpensive strip readers or basic phone apps can be used by fraudsters to steal your info. They could easily obtain your information without your knowledge.
Many would-be credit card thieves are foiled by the chip-in-your-chip credit card. The computer in the chip creates a distinct transaction code for that purchase each time you use the contactless payment option on your credit card or insert it into a reader.
This implies that a thief cannot utilize the information from a credit card chip they stole for one transaction to make another purchase on your account.
This also applies to retailer data breaches. While your credit card chip won’t prevent a data thief from obtaining purchase records or transaction data, it will significantly reduce the value and difficulty of using the stolen information.
Does your chip credit card need a signature or a PIN?
Historically, individuals using magstripe credit cards were required to sign for each transaction, with businesses verifying the in-person signature against the one on the back of the credit card. With the shift to chip credit cards, the practice of signing for purchases has significantly diminished.
Presently, fewer businesses prompt customers to sign receipts when using chip credit cards. Typically, the process involves inserting the chip card into the reader, waiting briefly, and removing the card upon prompt, with no signature needed. In the case of debit card purchases, a personal identification number (PIN) may be required at the checkout terminal.
While some establishments may opt for signatures instead of PINs, it’s important to note that the chip-and-signature approach is exclusive to the U.S. When traveling abroad, relying solely on a signature-based card may lead to complications, as many European countries employ a chip-and-PIN system, utilizing both an EMV® credit card chip and a four-digit PIN for significant transactions. For smaller purchases, contactless payments are prevalent and typically do not necessitate a PIN.
Chip cards don’t fix everything
The use of EMV® cards does not protect you from fraud. First of all, if your actual card is stolen, it can still be used to make purchases anywhere that doesn’t need identification or a signature (which is, let’s be honest, most places these days).
There is nothing your credit card chip can do to stop online credit card fraud. A fraudster can still use your credit card information online with relative ease. Online fraud has been affecting 65% of credit card customers, up from 58% in 2022, according to Security.org.
A lot of con games avoid chip technology entirely. Scammers may, for instance, deceive cardholders into divulging account details like their passwords or card numbers.
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FAQs
our chip might be okay. Try cleaning it gently with a washcloth — it might just be dirty. If that fails to fix the chip, then you may want to contact your card issuer to ask for a replacement card. Many will ship you a new card for free. You can still use a card with a broken chip to make online purchases.
Nope. Chip cards add zero security benefits to online transactions. But credit card users still get the benefits of $50 max fraud liability, so it’s more secure than paying for online purchases with debit.
Not all card readers accept chip cards, and chip cards might take a few seconds longer at checkout than magnetic strip cards.
Only if it has a magnetic strip. You can check this by eyeballing the back of your card.
Insert it into the point-of-sale (POS) terminal at checkout. Instead of swiping, you slide the card into a slot facing you. Be sure to insert the side with the chip facing up.
Your bank or credit union will send you one if it upgrades its cards. But if you’d like a chip card right away, you can apply for one from a different issuer.
How Do Credit Card Chips Work: Conclusion
Understanding how credit card chips work is essential in navigating the modern landscape of financial transactions. These chips, utilizing advanced technology, provide a heightened level of security and protection against fraud.
As we’ve explored in this article, the intricate process involves encrypting data, generating unique codes for each transaction, and ensuring a dynamic layer of defense against unauthorized access.
By comprehending the inner workings of credit card chips, users can make informed choices, appreciate the security measures in place, and use these cards confidently. Embracing this knowledge empowers individuals to engage in secure transactions, protect their financial assets, and contribute to a safer and more reliable financial ecosystem.
As we continue to witness advancements in technology, staying informed about the functionality of credit card chips is not just a matter of curiosity; it’s a fundamental aspect of responsible financial management in the digital age.
References
- https://www.investopedia.com – Chip Card: Definition, How It Works, Types, and Benefits
- https://www.fool.com – How Does the Chip in My Credit Card Work?
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