Tom: You are going to give us the scoop on the new chip and pin cards this morning.
Mellody: You’ve got that right, Tom. Many of our listeners have likely already received new cards in the mail that contain a microchip. If you haven’t, you will soon. The reason you are getting a new card? This month, retailers across the country are being required to transition over to the new chip and pin system for credit cards and debit cards. This past Wednesday, October 1, was the deadline set by Mastercard, Visa and other card companies, and October 16 is the deadline set by Afmerican Express. If retailers have not met these deadlines, they will now assume the financial liability for any fraudulent charges at their stores. This morning, I want to walk through what this means for consumers and for businesses.
Tom: Let me ask you this first: what is behind this transition?
Mellody: This move is all about security, Tom. Last year, $11 billion in credit card fraud was committed around the world. Over half of that was in the United States. Why? Because the United States – the world’s premier market for credit and debit cards – is decades behind the rest of the world when it comes to card security. The technology that we have used until now, the card and signature system, is a relic of the 1960s! Everywhere else, card companies and merchants transitioned to the more chip and pin system long ago.
Under chip and pin, your card has a microchip, and when you dip it (yes, you will now dip, not swipe) in the terminal at the store, it creates a unique signature code for that transaction. Even if fraudster does manage to get the code, it won’t work a second time, and it can’t be traced back to your real card number. This means that your information on your card is much more secure, and it is much more difficult for counterfeiters to access this information and reproduce a fake card.
Tom: Does this improve security on all transactions?
Mellody: Actually, no, and that is a big thing for card users to know about. While the new cards are expected to cut down on counterfeiting and point-of-sale fraud, the new chips do not prevent fraud on ‘card not present’ transactions, such as online purchases, where you enter your card number and expiration date. Generally, as security gets better in one area, the bad guys move to another area. In the UK, after the chip and pin system was adopted, counterfeiting fell significantly, but card-not-present fraud – purchases of goods online with stolen card numbers rose significantly.
What this means is that you should be even more cautious about keeping card numbers saved on your online accounts, like Amazon or Target, because hackers can still access your information and make fraudulent purchases there.
Tom: What else changes for customers?
Mellody: Actually, not much. As I mentioned, you will now have to dip your card rather than swipe it. For the time being, you will likely dip your card and sign, rather than entering a pin, but over time we will likely see a move toward pins for credit cards, just like for your ATM card. If you do not have a chip card yet, don’t sweat it. You will be able to swipe your magnetic strip cards just the same at most chip and pin registers, and if not, they will be able to key in your number. The biggest difference for consumers will likely be an extra few seconds for each transaction, because the system takes a bit longer due to the extra security measures.
Tom: How is the transition going so far?
Mellody: Slowly. Currently, only about a third of retailers have completed the transition over to the new terminals. A few big retailers, such as Wal-Mart and Target were aggressive in their transition, while others have been slower, especially small businesses. Only about 20% of single location businesses have completed the shift. Much of this has to do with the cost, which is between $100 and $600 per chip and pin terminal, and more if new software is required. Overall, analysts expect the full transition to take a while to complete, with the process of issuing chip cards should be “nearly complete” by 2017.
Tom: Always to have your insight, Mellody! Thanks for joining us!
Mellody: You are very welcome, Tom!
Mellody is President of Ariel investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News.