Banks in U.S. Moving to Chip-Based Debit and Credit Cards

Yahoo Finance – by Ann Carrns

In the coming year, banks in the United States are likely to replace debit or credit cards with versions that have tiny computer chips embedded in them, a move aimed at making shopping in stores more secure.

Bank of America, for instance, has just announced that, beginning this month, all new bank customers will be issued debit cards with chip technology, and that existing cards will be upgraded as they expire. The cards work by creating a unique code for each transaction. While the change will not necessarily stop data breaches from occurring, security experts say, the chip technology prevents criminals from using stolen information to create counterfeit cards. Most credit and debit cards in the United States rely on older “€œmagnetic strip” technology, which is vulnerable to hacking.  

Many big banks and credit unions have already been issuing chip-enabled credit cards to customers who travel overseas, where the technology is in wider use. The switch to chip-based debit cards has been slower, however, because of more complex payment networks used by those cards, said Julie Conroy, research director for retail banking at Aite Group. A recent spate of data breaches is helping to accelerate the change, however. Home Depot, for example, revealed last month that data from 56 million cards had been stolen in a breach of its computer network.

A spokesman for Chase said the bank already offered numerous credit cards with chips and expected most of its debit cards to be chip-enabled by the end of next year. Wells Fargo says it is testing chip technology with its debit cards and plans to issue them “on a broad scale” in the coming year.

Citibank will begin issuing debit cards with chips in 2015, it said in an emailed statement. Citibank said that all of its new consumer credit cards were issued with chip technology, and that the bank was on track to have half of its portfolio of consumer credit cards chip-enabled by the end of this year. Most customers can request a chip credit card from the bank online or by calling customer service.

There is a catch, however. Even if customers get a chip card now, they may not easily find a store that accepts it because retailers in the United States have lagged other countries in adopting payment terminals that can process the cards. Some major retailers like Whole Foods, Sam’€™s Club and Costco already have the systems in place, said Ms. Conroy, but “€œwe’€™re going to see cards hit the market more quickly than terminals.”€

Most big stores are expected to have chip-compatible readers by October 2015. That is when the liability for card fraud that occurs on nonchip terminals will shift away from card-issuing banks, which now bear the brunt of fraud costs, to the merchants.

Because of the staggered adoption, most of the chip cards being issued will have the magnetic strips as well, so they can be used even at stores that do not have upgraded card readers, said Rebecca Kastl, a senior consultant at Neohapsis, a security and risk management company.

Here are some answers to questions about chip cards:

Is there anything different about how the chip cards are used?

Unlike magnetic stripe cards, which are “swiped” at the cash register, chip cards are “dipped” into a reader and remain in the device for a few seconds while the transaction is approved. Customers need to remember to remove the card.

Ms. Conroy of Aite Group said that when the cards were first deployed in Canada, some merchants ended up with a pile of cards left behind by forgetful customers. “€œIt’™s a behavioral change,”€ she said.

Should I wait for my bank to replace my debit card, or ask for a chip card now?

Paul Stephens of the Privacy Rights Clearinghouse, a nonprofit consumer group, advises those who use debit cards to ask for a chip version as soon as it is available. Debit cards are linked directly to bank accounts and have less secure consumer protections than credit cards, he said, so it is important to use one with the latest security features. Banks typically cover losses from debit fraud if customers report a loss promptly. But, he warned, it can take up to two weeks for banks to restore the funds.

Will chip cards make online purchases safer?

Chip cards mainly protect against fraud when customers are shopping in a store; they’re less helpful for online shopping, since consumers are not using the actual plastic. In fact, analysts suspect there may be an uptick in online card fraud when chip cards become more prevalent, as criminals seek alternate ways to steal card data. So online stores may also consider further protections, like a special code sent to a customer’s mobile phone that must be entered to complete a purchase.

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