Chip and PIN cards

Chip and PIN Cards Are Shifting Fraud Liability in the U.S.

The U.S. card industry started to catch up to the rest of the world on October 1, 2016 when it started transitioning to the EMV (Europay, MasterCard and Visa) global standard, which defines the computer chip and technology used to process Chip-card transactions. As a consumer, the biggest change is that you have or soon will receive a replacement credit and debit card that has a computer chip.

What has not changed for the consumers is that your liability for fraud stays the same. It is still limited by federal law to $50 for credit cards. For debit cards, the same federal law caps your loss at $50 if you report the fraud with two business days after you learn of the loss, but up to $500 if you wait more that 60 days after your statement is sent to you. Beyond that there is no cap on how much you could lose.

Chip cards require that you insert the card into the card reader, rather than swipe it, like you traditionally have done, assuming the merchant has installed and activated the chip technology in the card reader. If the merchant is not able to process the Chip card, you then swipe the card. Chip cards still have a magnetic strip on the back.

The card issuer will determine whether you need to provide a signature or PIN (Personal Identification Number). Currently, almost all credit cards will continue to require a signature. Chip debit cards will continue to have a PIN and you will be prompted to enter either PIN or signature, depending on the merchant’s preference or yours, such as when you want cash back at the grocery store.

Since many countries outside of the U.S. require that a Chip credit card be used with a PIN, U.S. card issuers may be sending you a credit card and a PIN number or a credit card that can have a PIN number added when you travel overseas. In countries like the UK, not having a PIN greatly limits your use of the card, while is others such as Australia, merchants commonly accept Chip cards that use either a PIN or a signature.

What is important to remember is that federal law on fraud liability limits does not change for these overseas credit card transactions, even if you write your PIN on the card and both are then stolen and used fraudulently.

While the impact of Chip cards on consumers has been relatively light, many merchants are having their world turned upside down. For starters, they have the expense of installing new point-of-sale (POS) terminals that can accept and process Chip card transactions. And for larger merchants, such as Wal-Mart or Target, the POS terminal not only processes card transactions but also drives its accounting and inventory systems, all of which need to be adapted to the new technology.

But merchants now have a very powerful incentive to make the transition due to a shift in the liability for fraud losses caused by counterfeiting. Counterfeiting involves obtaining the account number and other information on the magnetic strip on the back of a card and producing a copy of the genuine card for fraudulent use.

Prior to the introduction of the Chip card, the card issuers had responsibility for most counterfeit card fraud losses. With the introduction of the Chip card, the responsibility now shifts to the whichever player in the payment processing chain has the lowest level of security, which could be the Merchant, the bank that manages the Merchant (Acquirer) or the bank that issues the credit card (Issuer).

If the Merchant does not process a chip card using the proper EVM chip standards in a chip-enabled terminal, then it is responsible for any resulting fraud losses. However, if the Acquirer either did not offer the Merchant chip technology or is not able to receive and pass on chip transactions to the Issuer, then it is responsible. The Issuer would be liable if it is not able to properly process Chip transactions. If every party in the process is processing Chip transactions properly, then responsibility for fraud losses defaults to the Issuer.

Some of the larger Merchants, such as Wal-Mart, are filing lawsuits against Visa to get them to make Chip and PIN cards the standard for debit cards, rather than offering a Chip and signature option. From the consumer’s perspective, signing gives you Visa and MasterCard’s zero liability for loss protections. A PIN-based transaction is routed to your checking account bank, where your liability starts at $50 and can progress to however much the fraudster can take.

So what does all this mean for the cardholder, the consumer? When using your Chip card, just follow the prompts on the card terminal. It will direct you to either insert or swipe your card. Let the Merchants, Acquirers and Issues settle the Chip and PIN issues.

If going overseas, consider getting a credit card with the PIN feature, to allow you more places to use your card.


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