Perhaps you’ve recently noticed a gold or silver colored metallic square on the front of your newest credit cards. It looks kind of cool and futuristic, but how does it work?
Of course, what you are looking at is a microchip that is often referred to as an EMV smart chip. EMV stands for Europay, MasterCard and Visa, the three companies that created this microchip authentication system for credit, debit and ATM cards. And despite its futuristic appearance, these type of chips have been around for about 30 years, even though they only started appearing on cards issued in the U.S. within the past five years.
How the Chip Works
These chips are designed to work in conjunction with the next generation of credit card terminals that have already been deployed in Europe, Canada and other parts of the world. Instead of swiping a credit card and having a machine read its magnetic stripe, cardholders or cashiers insert or “dip” the card into a machine that directly contacts the chip and reads it. But unlike a simple magnetic strip, the chip interacts with the machine that is reading it, in order to encrypt the data and authenticate it more securely. In effect, the credit card and its reader have an encrypted conversation in order to ensure the credit card is valid, while a simple (that is, “dumb”) magnetic stripe merely recites your credit card number and expiration date to any machine that can read it. It is this vulnerability that allows credit cards to be so easily cloned for fraudulent purposes.
After the chip is read and authenticated, what happens next depends on which kind of system the merchant is using. Some merchants use the so-called chip and signature system, which then allows cardholders to simply sign their receipt, just like they always have. Alternatively, some merchants use the chip and PIN system, which then requires cardholders to enter their four-digit personal identification number, much like they currently do with debit and ATM cards. The merchants that do so are mostly those that accept credit cards though unattended kiosks, like those in train stations, subway platforms and gas stations.
When Chip-Enabled Cards Don’t Work
This whole process is easy enough, when it works, but there are several ways that it might not. The most common issue is for American travelers, whose chip-equipped cards are often incompatible with the chip and PIN implementation in other countries. This problem often leaves Americans stranded at subways and gas stations where their chip and signature cards won’t work when a PIN is required. American travelers may also find themselves in long lines to buy train tickets at staffed counters that accept chip and signature transactions rather than vending machines that require chip and PIN. As of this writing, the Barclaycard Arrival Plus is the only credit card issued by a major bank that offers true chip and PIN compatibility, although others are expected to include this functionality before too long.