How Do Chip Cards Work?


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How Do Chip Cards Work?

Chip cards offer the global security standard for debit and credit card transactions. They are also known as EMV cards, named after Europay, Mastercard and Visa, the three companies that originally created the technical standard. Chip cards have become a go-to payment method for maintaining maximum security while using credit or debit cards.

In 2019, more than 97% of all card transactions used EMV technology in Europe, and in Africa and the Middle East, over 96% of transactions used the card type. Asia had a 76% usage rate, while the United States saw 63% of transactions utilizing EMV cards. The U.S.’s slower rate of EMV card adoption compared to the rest of the world is largely due to the fact that American card-present anti-fraud measures were historically more robust than in other countries.

This article provides a clear, informative look at how chip cards work, including:

  • The 2 main types of chip cards
  • When the chip card was invented
  • How chip cards work
  • How to process chip card transactions
  • How safe chip-and-pin technology is

The 2 main types of chip cards

There are two different types of chip card:

  1. A chip-and-pin card requires a customer to insert their card into a terminal and input their PIN number to complete a transaction
  2. A chip-and-signature card requires a customer to insert their card into a terminal and sign the receipt

It is important to note that chip-and-pin cards are increasingly replacing chip-and-signature cards, as the former prevents the possibility of signature forgery.

When was the chip card invented?

In 1959, an inventor named Jack Kilby filed the very first patent for an integrated silicon chip, a precursor to the modern-day chips found in many objects, including EMV cards. This invention would change electronics forever. Numerous developments since then have led to the creation of the EMV card in 1994 in Europe.

The driving force behind the creation of EMV technology centers around the fact that card authorization “was prohibitively expensive for card issuers” in Europe, coupled with its card payment system being particularly vulnerable to fraud. Chip-and-pin cards were introduced in the United Kingdom in 2004, and were officially introduced to the U.S. consumer market in 2015.

How do chip cards work?

Chip cards got their name because of the embedded gold or silver microchip that is found on the front of the card. This chip generates and keeps a record of unique data for every transaction. It also encrypts cardholder information as a means of increasing security against card-present fraud.

In the past, cardholders completed a transaction by swiping their card through a terminal and signing a receipt — the terminal would then read the customer’s information from the magnetic stripe on the back of the card. However, this form of data acquisition has grown extremely vulnerable to fraud as a result of technological advances in recent years. As such, there has been a global migration to EMV cards.

Because chip cards provide unique data for every single transaction, it is much more difficult for fraudsters to achieve card-present fraud. However, chip cards are not bulletproof. Card-not-present fraud reached $4.57 billion in 2016, according to the Federal Reserve. In Europe, card-not-present fraud made up 73% of all SEPA (Single Euro Payments Area) card fraud. Therefore, it is still critically important for both customers and merchants alike to take appropriate anti-fraud measures to protect sensitive financial data.

How are chip card transactions processed?

The entire EMV card-present payment process was created to protect against fraud and works as follows:

  1. The customer inserts their chip card into an EMV-ready payment terminal.
  2. The terminal reads the unique transaction information generated by the card’s chip to authenticate the transaction.
  3. The merchant asks the customer to confirm the monetary amount on the terminal screen.
  4. The customer is prompted to input their PIN number via the terminal in order to confirm the transaction.
  5. Once these four steps are complete, the terminal immediately contacts the card issuer in real-time, who then processes the transaction. The card issuer typically carries out further anti-fraud checks. If a transaction is deemed suspicious — for instance, if an unusually high monetary amount is involved — they may decline it or contact the customer for confirmation that it is indeed a valid purchase before processing.

Chip cards and fraud: How safe is chip-and-pin technology?

Chip cards are much safer than the previously used stripe cards, which contained sensitive customer data within the magnetic stripe on the back. To process a transaction with the swipe cards, terminals simply read the information on the magnetic stripe and the customer would then confirm the transaction with their signature. The difference with chip cards is that the magnetic stripe provided the same information for each transaction but it was not protected by technology like encryption. This created a way easier target for fraudsters, while signature fraud was also prevalent.

To combat these problems, the invention of chip cards enabled card issuers to generate unique transaction data for every transaction and encrypt the information generated. The PIN number requirement also removes the threat of signature fraud. That being said, customers and merchants should still approach fraud very seriously, as chip card technology does not guarantee 100% safety. Data breaches can (and do) still occur, and furthermore, chip-and-pin technology does not prevent card-not-present fraud, where purchases are made online or over the phone.

CNP fraud has been so problematic that two-factor payment authentication — the security practice that requires a customer to confirm a transaction via two separate means such as a unique code and then receiving the code via their cell phone — is becoming increasingly common when making a payment online or even in person.

Chip cards provide greater security than their magnetic stripe predecessors and chip-and-pin cards are more secure than their chip-and-signature counterparts, but the responsibility is still on both the customer and merchant to keep financial data safe, and in the case of merchants, to keep their customers’ data safe.

Wrapping up: How do chip cards work?

Chip cards represent a significant leap forward in card payment technology and security. While the technology has been used in Europe since 1998, it is relatively new to the American consumer market. Today, chip card payments are accepted via EMV-compliant terminals through a simple five-step process, as explained above. While they make both customers and merchants safer from fraud, they do not provide a silver bullet solution.

In any case, the right payment processing provider can ensure chip card transactions with the maximum achievable security level, which makes this form of payment a comfortable choice for merchants and shoppers as well, whether by using terminals or mobile card readers at the point of sale.

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