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Embedded chip to replace black strip
NEW YORK — The next time you swipe your credit card to pay for something, consider this: It’s a ritual the rest of the world deems outdated and unsafe.
The United States is the only developed country still hanging on to credit and debit cards with those black magnetic stripes, the kind you swipe through retail terminals. The rest of the industrialized world has switched — or is in the process of switching — to “smart” chip-based cards.
The problem with that black magnetic stripe is that it’s about as secure as writing your account information on a postcard: Everything is in the clear and can be copied. Card fraud, and the measures taken to prevent it, cost U.S. merchants, banks and consumers billions each year.
The smartcards can’t be copied, which greatly reduces the potential for fraud. Smartcards with built-in chips are the equivalent of a safe: They can hide information so it can only be unlocked with the right key. Because the important information is hidden, the cards can’t be replicated.
But the stripes have been so entrenched in the vast U.S. payment system that banks, payment processors and retailers have failed to reach consensus on how to revamp the method, leaving the U.S. behind the rest of the world.
“The card system in this country has been dysfunctional for a long time,” said Mallory Duncan, general counsel of the National Retail Federation. “We have far, far too much fraud because we have a very antiquated payment system relative to the rest of the world.”
Yet even here, there are now serious moves to swap conventional cards for smartcards in a few years.
Last month, Visa announced new policies that will give U.S. banks a reason to issue smartcards and stores several reasons to accept them, starting in 2015.
Eric Schindewolf, product manager for smartcards at Wells Fargo & Co., said Visa’s announcement is a “watershed” moment.
“I think that the U.S. has reached a tipping point. You’ll begin to see more and more smartcards in the hands of U.S. consumers,” he said.
Smartcards are recognizable by the fingernail-sized gold contacts embedded on one side. Through the contacts, a chip inside the card can transmit information to a terminal when slid into a slot.
Bills can be paid for without the card leaving the customer’s sight, and the combination of chip and a PIN code kept the transaction safe from fraud.
The U.S. payments industry has so far been locked up in a “chicken and egg” quandary, Mr. Schindewolf said. Stores had little reason to install terminals for smartcards if banks didn’t issue them, and aside from some contactless cards, banks didn’t issue them because stores wouldn’t accept them.
The impasse has left U.S. businesses and consumers struggling with higher fraud rates.
Richard Sullivan, the senior economist in payments research at the Federal Reserve Bank of Kansas City, estimates that in 2006, 9 cents out every $100 paid by card in the U.S. ended up in the pockets of criminals. The comparable figure for Spain was 2 cents. Mr. Sullivan thinks the use of smartcards there is one big reason for the difference.
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