Chips fall into place for smart cards

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The shift from magnetic strip credit cards to microchip embedded plastic money just got another nudge forward as MasterCard Canada recently announced that a major payment processor in North America is embracing smart card technology.

MasterCard, which recently approved Chase Paymentech Solutions LLC of Dallas to process smart card transactions, said it hopes the processor’s client base of 600,000 merchants with nearly one million locations in Canada and the U.S. will speed up widespread migration to chip-based credit cards.

“Chase Paymentech is the first acquirer in Canada to accept MasterCard chip transactions, but we hope to see more adopters as vendors gain confidence on the security and benefits provided by chip technology,” said William Giles, vice-president, advance payments, MasterCard Canada.

Smart cards appear similar to traditional credit cards, but instead of a having a magnetic strip on the back, the new cards contain an embedded microprocessor that is able to store more information that can be encrypted. The cards employ a secure and application-rich microprocessor based on Europay MasterCard Visa (EMV) standards, an international standard created by the three card makers for chip-based payment cards to ensure interoperability of different cards and payment terminals.

Visa and MasterCard, which have purchased Europay, have set the year 2010 as a deadline for merchants to migrate to chip transactions. After the deadline, any vendor who has not switched to the new system will be held liable for fraudulent card transactions in their stores.

Chase Paymentech will begin rolling out payment terminals and readers to their clients before the end of this month, according to Bill Farris, strategic product manager for the company’s Canadian branch headquartered in Toronto.

“We expect our merchant customers to be pleased with the business and security benefits they will gain when we begin to upgrade their checkout and point-of-sale devices to accept chip cards,” said Farris. He said the chip cards provide better built-in deterrents against credit card fraud. “Fraudsters are able to easily reproduce information contained in magnetic strips. It will be harder for them to break into the encrypted data inside the microchip,” said Farris.

Smart cards contain a 32-bit microprocessor capable of carrying more data than traditional magnetic strip cards. This will enable chip embedded credit cards to provide “value added” information that vendors can use.

For instance, “vendors can use these cards to garner information to support customer loyalty programs,” said Giles.

He said vendors switching to the new system will only need to invest in new card readers that will cost around $7 per unit.

Canadians, it seems, are prepared to make the switch according to David Saffran, senior vice-president of survey firm, Ipsos-Reid Corp. in Toronto.

The company polled some 1,500 adult credit card-carrying Canadians in 2005 and found more than 45 per cent were aware of chip cards.

“Identity theft and credit card fraud is a pressing issue for most consumers and people we polled seem to have a positive attitude towards smart cards,” said Saffran.

At least one Canadian analyst however said most of the benefits of migration to smart cards will actually go to the card makers themselves.

“The real benefits will not be for vendors, or consumers as much as for the likes of Visa and MasterCard,” said Mark Tauschek, senior research analyst, Info-Tech Research Group, Inc, London, Ont.

Tauschek said the move to chip embedded cards is largely driven by the need stamp out credit card fraud. In 2004 alone, Visa and MasterCard made more than $168.8 billion in sales, but lost an estimated $163 million in fraudulent transactions, according to Tauschek.

“That’s a very large incentive to carry out this project,” Tauschek said.

He said the enhanced security of chip cards will be an effective deterrent to fraud, as it involves a dual authentication system: encrypted data on the chip and the personal identification number (PIN) the user provides.

Currently, criminals are easily able to use stolen cards because some cashiers don’t even bother to check for signatures when a card transaction is made.

Tauschek said the cost of migration would be minimal for merchants but raised concerns about how consumers might react to the chip card’s ability to hold more personal information about them. “I foresee some privacy concerns coming up because – in theory – personal information might be passed from vendor to vendor,” said Tauschek.

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