Will Chip-and-PIN Credit Cards Become a Reality for U.S. Consumers?

Technology exists that makes credit cards much less vulnerable to fraud. However, it is still not available in the United States. The new system is known as “chip-and-PIN.” As the name suggests, it improves security by inserting a tiny chip into the card, which must be activated by a personal identification number (PIN) when scanned at the point-of-purchase. The current magnetic strip system only requires a user signature and is more readily cloned by criminals.

Card issuers and retailers in Europe have embraced chip-and-PIN technology. According to statistics from the United Kingdom Payments Administration, total losses from in-store credit card fraud decreased from 218.8 million pounds ($356.5 million) in 2004 to 98.5 million pounds ($160.5 million) in 2008. Removing the signature requirement also reduces costs for retailers.

Adoption is moving slowly in the United States, in large part because one of the primary advantages for credit card companies cannot be realized under U.S. law. In the UK, consumers are held accountable if their pin number is used to complete a disputed transaction, while the merchant holds responsibility otherwise. In this country, such liability shifts are precluded under Electronic Fund Transfer Act of 1978 and Regulation E. Many retailers are also not eager to make the switch because it requires them to purchase all new equipment.

President Obama recently took executive action to spur the adoption of chip-and-PIN technology. Under the BuySecure Initiative, chip-and-PIN cards will become the standard for federal government programs. Federal agencies that process consumer sales will also replace card terminals with those with new chip and PIN security features. President Obama also announced that several leading retailers, including Home Depot, Target, Walgreens, and Walmart, would be rolling out secure chip and PIN-compatible card terminals in 2015.

“The idea that somebody halfway around the world could run up thousands of dollars in charges in your name just because they stole your number, or because you swiped your card at the wrong place in the wrong time, that’s infuriating,” Obama said.

It will be interesting to see how the executive action impacts the stalemate on credit card security. California recently attempted to enact legislation that would require larger retailers and credit card issuers to implement the new payment system. However, the bill died in committee after facing stiff opposition from the tech and banking industries.

If you have questions about this post or would like to discuss how new credit card security laws may impact your business, please the Scarinci Hollenbeck attorney with whom you work.