Hidden costs of chips: Starting in October, credit card companies may no longer pick up the tab for fraudulent transactions.

David Adams

David Adams

No, not potato chips, micro-chips! Beginning October 1, 2015, merchants and card-issuers may be liable for fraudulent transactions, depending on who’s the #LeastTechSavvy. At present, credit card companies, for the most part, cover the costs of counterfeit transactions when they occur over their networks. However, after October 1, Visa, MasterCard, Discover and American Express have announced that whichever party has not updated their technology to meet the new EMV or Chip and Pin cards will be responsible for the cost of the fraudulent transaction.

How it Works
So how does this “Chip and Pin” technology work? It’s simple, instead of sliding your debit/credit card through a slot, you’ll place it on a reader, similar to the machine we all currently use to swipe. This device will read the micro-chip placed on the front of the card, instead of the magnetic strip we all see today. The cards we use today store our unchanging information in the magnetic strips we see on the back of our cards. Thus, if someone is able to replicate the information on the magnetic strip, they have access to whatever information is on the card.

The new Chip and Pin microchip’s however, create a unique set of data that is only used once per transaction. While this difference won’t eviscerate fraud completely, if all goes as planned it certainly could put a large dent in fraudulent activity.

Most countries have already transitioned to the EMV (which stands for Europay, MasterCard and Visa) technology as a way to combat fraudulent card transactions and will only accept Chip and Pin Cards. The United States is not completely lacking this technology, as many banks have already begun issuing Chip and Pin cards and some merchants, including Walmart, have updated to EMV technology.

Liability Shift
As for the liability shift, it seems to be more of an encouragement for cohesiveness in the regulations than an actual shift in liability. The goal is to limit fraudulent transactions, not to actually shift the liability. So, for example, if a woman goes to make a purchase with a Chip and Pin card and the merchant does not have the reader to accept the micro-chip, the merchant will be liable for any fraudulent transaction that occurs. If a woman goes to make a purchase with a magnetic strip card and the merchant has an EMV device that accepts the Chip and Pin cards, the bank issuing the magnetic strip card will be liable. In other words, whichever party has not complied with the change, will be liable for the fraudulent transfer.

There is no reasonable expectation that on October 1 all magnetic strip cards will vanish into thin air. As of now, Chip and Pin cards will still have a magnetic strip, just to give merchants a chance to adjust to the new machines. And, consumers will be able to use both the strip and the chip, eliminating any lapse in the ability to use credit or debit cards.

As you can imagine, there are still some kinks to work out. For example, whether you use a pin number depends on the technology connected to EMV card and not whether the card is a debit or credit card. In the future, credit cards and debit cards will have unique personal identification numbers. Since many of the new EMV devices aren’t prepared to accept pin numbers yet, during the transition, most consumers will actually be using chip and
signature cards.

This may cause some issues with usage overseas, especially in places using Kiosks that only accept Chip and Pin cards. Despite the issues, your chances of being able to make a purchase overseas with a transitional chip and signature card are much higher than without it. Fuel vendors will have some extra time (two more years exactly) to transition to the new technology for pay at the pump transactions. Some patience will be necessary, especially for those people who always seem to end up in a line with someone at the register having card issues. But, maybe you can pick up a bag of BBQ potato chips while you wait… or not.

— David Adams is a partner at Stites & Harbison and leads the Georgia Office Banking Team for the firm.