Chip Cards – Are They Really More Secure?

Open your wallet and take a look at your credit cards and debit cards. Chances are high that at least a couple of your cards now feature EMV, otherwise known as PIN-and-Chip, technology. These chip cards are only going to become more and more common in the future, so if you do not already understand how these cards work to make your credit cards and debit cards more secure here is some helpful information.

The Purpose of Chip Cards

Chip cards are indeed more secure and better equipped to reduce credit card fraud than cards which feature the much more antiquated magnetic stripe technology with which you are probably most familiar. EMV cards (an abbreviation of Europay, Mastercard, and VISA) feature a newer type of credit card technology which makes it harder for thieves to use your account information for fraudulent charges. The new smart cards utilize a computer chip to both encrypt and store your account information.

Of course keep in mind that this “new” technology is actually not so new after all. It is only new to the United States. EMV cards have been widely used throughout Europe for many years.

Each time your EMV card is used a unique transaction code is created, a transaction code which fraudsters cannot turn around and reuse for future purchases. Comparatively, magnetic stripe cards store fixed data which can easily be stolen and then reused over and over again for unauthorized purchases. EMV technology certainly is not fool proof (especially not the hybrid cards magnetic stripe/chip cards which many US card issuers are currently distributing to customers) but it is certainly a step in the right direction.

purpose of chip cards

The Liability Shift

The good news for you as a consumer is that you personally will not be held liable for fraudulent transactions on chip cards. In fact, except for small amounts, you legally cannot be. The Electronic Fund Transfer Act (enacted in 1978) and the Fair Credit Billing Act (enacted in 1974) have both protected you from liability for fraudulent credit card and debit card transactions for decades.

The Fair Credit Billing Act caps consumer responsibility for fraudulent credit card transactions at $50. The Electronic Funds Transfer Act does permit your responsibility for fraudulent debit card transactions to climb a bit higher – $500 to be exact unless you report the fraud within 2 days. However, most credit card issuers and banks will waive your liability entirely as long as you report the fraud and/or theft of your account information promptly. There is a catch to this protection, however. If you fail to report the fraud then you could potentially be personally liable for 100% of the fraudulent charges.

Formerly credit card issuers and banks generally absorbed the responsibility for fraudulent transactions themselves. A few years ago, however, a liability shift occurred. As of October of 2015 the responsibility to bear the cost of fraudulent transactions will fall upon whichever party (the card issuer/bank or the merchant) who is the least EMV compliant.

Here is a look at how liability for fraudulent transactions is now determined. If a merchant has a payment terminal which supports EMV (Chip Cards) technology but the card issuer/bank is still distributing the old magnetic swipe style cards then the liability for the transaction would fall upon the card issuer or bank. On the other hand, if a merchant has not upgraded their POS system to accept EMV enable credit and debit cards then the liability for fraudulent charges could fall back upon the merchant.

Consumers, at least for now, remain the most protected. Of course, fraud reduction attempts are ultimately in the best interest of the consumer as well. Reducing fraud lowers costs to credit card issuers and banks which can in turn translate into savings for consumers in the future as well.