The Chip and Pin Credit Card System: A Field Report from France

I'm just back from a gorgeous 10 days in Paris. Being a credit geek through and through, I had Europe's new "chip and pin" credit card system on my list of must-sees along with the Eiffel Tower and the Arc de Triomphe.

Some background: Back in 2003, the UK instituted a new credit card security program to help reduce fraud. Called chip and pin, the system required all credit cards to be outfitted with a small microchip (many US cards now also have these chips) and for the user to have a pin number. This replaced the traditional swipe and sign system still in use in America.  Controversially, the switch also transfered fraud liability from the credit card issuers to the retailers directly under UK law.

The results of the switch were plain to see. Credit card fraud in the UK dropped by a third in the first year that chip and pin was implemented. Other European countries have followed suit, implementing their own chip and pin systems mirroring the UK model.

To pay with a credit card at a restaurant in Paris, the waiter brings you a wireless handheld credit card reader (pictured). A chip card is inserted in the device and then its passed over to the customer for pin entry. Once the transaction is approved, the reader prints out a receipt. The device also allows for cards using the swipe and sign process.

Paying using swipe and sign garnered a few funny looks from retailers while I was in Paris. For added security, most required me to produce an ID and copied my details on to the receipt. Some weren't even sure how to run a card not using the chip and pin system.

Given the proven effectiveness of the chip and pin system and the relatively easy implementation process, I'm surprised that the US hasn't considered the program.

Emily Davidson – Credit.com's Communication Director and former TransUnion credit expert. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com moderator.

Comments

[Gerri Detweiler]

Cool idea -- how do they handle transactions over phone and online?

[Emily Davidson]

Good question! According to this article - http://www.out-law.com/page-6315
there aren't chip and pin type fraud protections for those purchases.

[Tom Mahoney]

Chip and PIN cards have had some interesting results. In short, I believe they did exactly what they were designed to do; that is to move fraud out of the 'card present' realm.

Note that I didn't say that they were designed to reduce fraud, only to move it. The result has been that those who would commit fraud have moved over to the on-line (Card Not Present) world, and I believe that's exactly what was intended.

The reason is simple. In the Card Present world, the card issuers normally take the losses; in the E-Commerce world of Card Not Present transactions, the merchant eats the losses AND gets hammered with charge back fees that are a revenue stream for issuers and processors. The result: the issuers are loosing less money to fraud and gaining a revenue stream from it instead.

Tom Mahoney, Director
Over 3600 Merchants united to protect themselves
http://www.merchant911.org
http://www.preventchargebacks.com

[hank]

I'm curious, why do you believe the chip-and-pin system is good?

Do you read comp.risks regularly? If not, you should. This is from

http://groups.google.com/group/comp.risks/browse_thread/thread/b4c51126948e93a2/00c0d93d73fae0aa?lnk=gst&q=card+chip+pin+system#00c0d93d73fae0aa

---- excerpt

I am hoping that this story will be picked up by the science press, so that
we can learn some of the details.

According to You and Yours, there have been previous incidents of
chip-and-PIN fraud where unscrupulous retailers were able to add items to a
customer's bill after the payment transaction.

nick rothwell -- ...

[Pete Mellor noted a BBC item on this:
http://news.bbc.co.uk/go/pr/fr/-/1/hi/england/4980190.stm
noting that this situation "rather dents the claim that the introduction of chip-and-pin would dramatically reduce the level of 'plastic fraud'."
PGN]
---- end

[Ken]

You say that there are US credit card companies offering chip-and-pin, but I haven't found one yet. Do you have any names?