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Will This Solve Fraud?

Beginning later next year, you will stop signing those credit card receipts. Instead, you will insert your card into a slot and enter a PIN number, just like people do in much of the rest of the world.

The U.S. is the last major market to still use the old-fashioned signature system, and it’s a big reason why almost half the world’s credit card fraud happens in America, despite the country being home to about a quarter of all credit card transactions.

The recent large-scale theft of credit card data from retailers including Target and Neiman Marcus brought the issue more mainstream attention, leading to a Senate Judiciary Committee hearing this week. Executives told the senators that once the country transitions to the new system — which includes credit cards embedded with a microchip containing security data — these kind of hacking attacks will be much more difficult to pull off.

The shift is coming though: both MasterCard and Visa have roadmaps for the changeover, and both have set October, 2015 as an important deadline in the switch. But why has it taken this long, and how will the changeover work for card users and businesses?

Much of the rest of the world switched to chip and PIN cards years ago. Why has it taken the U.S. so much longer?

There’s a historical view to this. In the past, other markets migrated for two reasons. First, there were higher fraud rates in some other markets, and they wanted to make this move to combat fraud. Second, this system can operate in offline mode – the card and the terminal can authorize a transaction independent of communication with the bank’s systems. In some other markets they struggled with robust telephony networks, so this offline capacity was attractive.

Both those factors were not driving factors here in America. Fraud was more prominent in some other markets, but what has happened since then is that as other markets migrated to EMV and became more secure, fraudsters migrated their activity to markets with less security. We saw fraudsters move over to the US market – they are looking for the path of least resistance.

There were also some more specific challenges to US migration to the new system. Because the US is one of the largest and most complex markets, the business cases for the costs had to be established. And there were requirements of the Durbin amendment, mandating all us debit transactions are able to go across at least two networks, which took some time for the industry to sort out.

It seems now like there is agreement on the switch. So when will the changeover happen?

For MasterCard, now is the time. They introduced their roadmap for migration in 2012, and that roadmap says that for face-to-face transactions, where a consumer uses their card at a merchant’s location, the liability shift will happen in October, 2015.

Part of the October 2015 deadline in their roadmap is what’s known as the ‘liability shift.’ Whenever card fraud happens, we need to determine who is liable for the costs. When the liability shift happens, what will change is that if there is an incidence of card fraud, whichever party has the lesser technology will bear the liability.

So if a merchant is still using the old system, they can still run a transaction with a swipe and a signature. But they will be liable for any fraudulent transactions if the customer has a chip card. And the same goes the other way – if the merchant has a new terminal, but the bank hasn’t issued a chip and PIN card to the customer, the bank would be liable.

The key point of a liability shift is not actually to shift liability around the market. It’s to create co-ordination in the market, so you have issuers and merchants investing in the migration at the same time. This way, they’re not shifting fraud around within the system; they’re driving fraud out of the system.

What are your thoughts?