How Does Chip & PIN Actually Work?

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 World Elite Mastercard 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.

Yet as these machines are deployed throughout America, another problem is occurring. There are now many stores that have credit card readers that appear to accept cards with microchips, but don’t have the functionality enabled. So eager cardholders with smart chip-enabled cards might insert their cards, only to find that it must still be swiped the old-fashioned way. It turns out that the hardware is there for future compatibility, but the retailer and its credit card processor haven’t purchased the software required to actually use it.

Chip Compatibility to Speed Up

We are now living in a time of limbo where some merchants in some countries require chip cards while others are incompatible with the new standard, but that is changing. The industry has already agreed to undergo a liability shift by October of 2015. Rather than imposing a hard deadline to change over to the new system, the industry is going to make retailers, credit card processors and card issuers liable for fraud, but only when they fail to upgrade their systems. Imposing this considerable financial risk is intended to compel all parties involved to move forward and adopt the more secure technology.

If you’re interested in being one of the first adopters, you can apply for a chip-and-pin credit card now. You might want to check your credit scores (which you can do for free on before you apply for a credit card to see where you stand — improving your score may get you access to lower APRs.

The future is coming, and it will be costly for those businesses that don’t keep up with the times.

Note: It’s important to remember that interest rates, fees and terms for credit cards, loans and other financial products frequently change. As a result, rates, fees and terms for credit cards, loans and other financial products cited in these articles may have changed since the date of publication. Please be sure to verify current rates, fees and terms with credit card issuers, banks or other financial institutions directly.

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Image: Safiye Can

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