Today, when customers visit a store, there’s a high likelihood that they’ll make a payment using their card, whether it’s debit or credit.
In fact, according to the Federal Reserve Bank of San Francisco, debit cards are the most preferred form of payment (making up 30% of all payments). Forty-two percent of participants in the survey preferred paying with debit cards, while 29% opted for credit cards — with cash coming in at just 23%.
While we shouldn’t expect cash to go away anytime soon, preparing for a world where credit cards take priority is imperative. Today, we’re going to clue you in on everything you need to know about chip and signature payments: from the cards we use to make these payments to the technology that’s behind them, to even what they’re not.
What is a chip-and-signature card?
Chip-and-signature cards are a type of payment card that stores its information both on the magnetic stripe on the back as well as on the embedded microchip. It’s perhaps one of the most common types of credit cards used in the U.S. today.
However, before we take an in-depth dive into the technology behind chip cards, let’s look at a couple of things that chip-and-signature cards are not, for clarity’s sake.
They are not NFC cards
Chip-and-signature cards are equipped with EMV technology, which stands for Europay, Mastercard, and Visa (more on that later).
However, NFC, which stands for near field communication, is a form of technology that can be embedded into items such as cards, phones, or tags which allows them to transfer information wirelessly through radio frequencies.
For example, contactless cards—which are still gaining popularity in the U.S. but are commonplace across much of Europe—use NFC technology, allowing you to pay by tapping your card against a terminal. Most modern chip and signature cards (also known as dual-interface cards) utilize NFC technology. The EMV chip provides the security, and the NFC provides the wireless transmission method to enable contactless (tap-to-pay) functionality.
They are not magnetic stripe credit cards
Despite often also having a stripe on the card, chip-and-signature cards are not like their predecessor, the magnetic stripe card. Also called a swipe card or magstripe, these cards used to be the backbone of credit card technology across the country.
The credit card information is stored on the magnetic stripe and can be read by the magnetic head when you swipe your card on the side of a point-of-sale (POS) terminal when making a transaction, which then approves or denies the transaction. However, if the magnetic stripe becomes too scratched or dirty, it could stop working.
A glaring security issue with swipe cards happens with credit card fraudsters copying and skimming the data on the magnetic stripe. As long as thieves were able to clone your magnetic stripe card, they would need no other information or tools to start using the duplicate card, as there were no other security protocols or measures in place. With nothing stopping fraudsters from simply using a made-up signature, cloning credit cards was a lucrative opportunity to commit fraud.
Because of the low barrier in skimming and copying data, magnetic stripe cards have been predominantly phased out and are being replaced by chip-and-signature credit cards, which are more secure for cardholders, business owners, and banks.
How do chip and signature credit cards work?
In addition to having the familiar magnetic stripe, chip-and-signature cards, which are sometimes called smart cards, come embedded with a square microchip that records information about each purchase transaction. The magnetic stripe remains on the card primarily to ensure backward compatibility with older terminals, ATMs, and gas pumps that are not yet EMV-enabled, although its use triggers the EMV liability shift onto the merchant if chip functionality is bypassed.
Unlike magnetic stripe cards that only offer static information, thus making you more susceptible to credit card fraud, chip-and-signature cards’ microchips create an ID unique to every purchase made. The microchips create a dynamic cryptogram (or unique authentication value) that is good for that transaction only. This significantly decreases the risk of your credit card being skimmed or cloned, because even if your card were to be copied, fraudsters wouldn’t be able to make purchases with that counterfeit card, as they’re unable to generate a correct cryptogram.
What’s the technology behind EMV signature and chip cards?
Chip-and-signature cards use EMV technology, the successor to magstripe cards. Created partly by Europay, Mastercard, and Visa, EMV technology standards were pushed by the three credit card companies, leading to rapid adoption nationwide.
Issuers in Europe adopted this standard primarily to mitigate rising counterfeit card fraud and because international phone line authorization was prohibitively expensive for authenticating static magstripe data across borders, which accelerated the transition to the more secure chip technology.
EMV-enabled smart cards work together with the payment terminal by creating a one-time code that’s encrypted (a token or cryptogram). This dynamic token is then decoded either online or offline, and once it’s verified, you can complete your purchase.
This type of chip technology provides extra security in comparison to older magnetic swipe cards because instead of simply having to read the data encoded on the magnetic stripe, your chip-and-signature card’s microchip generates a digital token, which is only good for that transaction and that transaction only.
By having a fully encrypted digital signature that’s unique for each transaction, simply cloning the data generated from that transaction is useless. While a magnetic stripe card’s data is static and can be more easily skimmed, having a chip-and-signature card generating unique and encrypted tokens significantly raises the barrier for credit card fraud.
Currently, there are two main forms of credit and debit cards utilizing EMV technology: chip-and-signature and chip-and-PIN cards.
What’s the difference between chip-and-signature and chip-and-PIN cards?
While both cards have the embedded microchips and can be read by EMV chip terminals, there are some key differences when it comes to how each card completes a transaction.
With chip-and-signature payments, the card is inserted, but the customer is no longer required to provide a signature. Visa, Mastercard, Amex, and Discover eliminated the signature requirement for most transactions in the U.S. starting in April 2018.
On the other hand, if your customer inserts their card and then has to put in a personal identification number, or a PIN, that means they have a chip-and-PIN card.
Most debit cards in the U.S. generally use chip-and-pin EMV tech, while credit cards tend to utilize chip-and-signature EMV technology, although this isn’t a hard-and-fast rule.
Do note that this is not exclusively an either/or situation, as some card issuers and financial institutions provide credit cards that are both chip-and-signature and chip-and-PIN. Should you have a chip-and-signature card that comes with PIN functionality, you may be able to choose which setting you prefer (such as “signature preferred” or “PIN priority”).
The advantage of having a card like this means that you can easily switch between settings depending on what country you are in. Otherwise, opting for a PIN-priority card may make more sense if you travel abroad a lot, since many other countries use a PIN verification system.
This difference is also financial for the merchant: debit transactions processed using the PIN debit network are often cheaper due to federal regulation (Durbin Amendment) than those processed over the signature debit network.
While this article is mostly focused on chip-and-signature payments, chip-and-PIN cards are growing more popular in recent years, partly to make credit and debit cards more compatible on a global level, but also due to security. So, let’s take a quick dive into chip-and-PIN cards.
What do I need to know about chip-and-PIN payments?
As with chip and signature cards, chip-and-PIN credit cards are based on EMV technology and started to become popular in Europe in 1993. Chip-and-PIN cards provide an extra layer of security to both the old magnetic swipe cards and chip-and-signature cards by having both a microchip and PIN requirement.
This means that not only is there the unique token generated for each transaction, you also have a (generally) 4- or 6-digit PIN number that only you should know, providing even greater fraud protection.
Chip and PIN provides a cleaner audit trail. While the signature requirement is obsolete (meaning no paper records are needed for verification), the PIN entry is the strongest form of cardholder verification method (CVM), significantly reducing chargeback risk for the merchant.Additionally, employees don’t need to check signatures to ensure they match the ones on the back of the credit or debit card.
How is fraud handled with chip-and-signature payments?
In 2015, the major card networks (Visa, Mastercard, etc.) implemented the EMV liability shift, stating that the party—either the merchant or the card issuer—that uses the less secure technology (i.e., magstripe) is liable for counterfeit card fraud.
In other words, merchants or business owners who use payment terminals that only accept magnetic swipe credit cards would be at fault should a credit card fraud dispute arise, as these are no longer the most secure way to process payments. As fully switching to chip card readers will take several years, it’s likely that you’ll continue to see payment solutions that combine both forms of technology in one way or another.
Which EMV point-of-sale terminal should I use?
If you’re a small business owner looking to accept EMV credit cards, you’ll need a chip card reader with updated technology. The good news is that most payment terminals that accept EMV technology work with both chip-and-PIN and chip-and-signature cards, so as long as you and your staff are properly informed about how these POS terminals work, there’s no need to choose between one or the other.
By ensuring that you can handle credit card transactions utilizing the latest and most secure payments technology to keep you and your customers’ data security front and center, you’ll be able to limit your liability should the worst happen.
What does the future of payment solutions technology look like?
It’s likely that over the upcoming years, credit cards and card reader technology are going to evolve. As we fully phase out magnetic stripe cards for today’s smart cards, we might start to see a shift from chip-and-signature cards to a preference for chip-and-PIN cards.
With NFC technology on the rise and becoming a more popular form of payments technology, we’ll start to see more places offering “tap to pay” options, which are contactless payment options such as Apple Pay or Google Pay that allow customers to pay by simply tapping their card or phone against a terminal. Contactless technology has surged since 2021. As of 2024, nearly 70% of all debit cards are NFC-enabled.
Moreover, newer cards are emerging with built-in fingerprint sensors that authenticate the user on the card itself, providing the security of PIN without the need to type anything, representing the ultimate fusion of EMV and biometrics.
But for now and the foreseeable future, having a universal POS terminal equipped to handle both chip-and-signature and PIN payments, will enable you to make credit card processing a breeze for everyone involved.
Stax can help you modernize your payment technology. Offering hardware and software solutions to help you accept payments in all forms, so you can serve and transact with your customers in the best way possible. Get in touch to learn more.
FAQs about chip-and-signature card
Q: What is a chip-and-signature card?
A chip-and-signature card is a type of payment card that stores its information on the magnetic stripe on the back as well as on the embedded microchip. It is one of the most common types of credit cards used in the U.S.
Q: How do chip-and-signature credit cards work?
Chip-and-signature credit cards work by recording information about each purchase transaction on a microchip embedded in the card. This microchip creates a unique token/cryptogram for every purchase made, which significantly decreases the risk of the credit card being skimmed or cloned.
Q: What is the technology behind EMV signature and chip cards?
EMV technology, used in chip-and-signature cards, was developed by Europay, Mastercard, and Visa. It generates a one-time code for each transaction that’s encrypted and then decoded either online or offline to verify the transaction.
Q: What’s the difference between chip-and-signature and chip-and-PIN cards?
The main difference between chip-and-signature and chip-and-PIN cards is the way each card completes a transaction. Chip-and-signature cards require a signature after the card is inserted into an EMV terminal, while chip-and-PIN cards require a personal identification number (PIN). This difference is also financial for the merchant: Debit transactions processed using the PIN debit network are often cheaper due to federal regulation (Durbin Amendment) than those processed over the signature debit network.
Q: Can chip-and-signature cards work abroad in chip-and-PIN countries?
Yes, chip-and-signature cards can generally be used abroad successfully in chip-and-PIN countries.
Q: How is fraud handled with chip-and-signature payments?
In the event of credit card fraud, the U.S. government has decided that whichever party is least EMV compliant would be held liable. This places the responsibility on merchants or business owners who use payment terminals that only accept less secure forms of payment, like magnetic swipe credit cards.
Q: What kind of point-of-sale terminal should I use for chip-and-signature cards?
If you’re a small business owner looking to accept EMV credit cards, you should use a chip card reader with updated technology. Most payment terminals that accept EMV technology work with both chip-and-PIN and chip-and-signature cards.
Q: What does the future of payment solutions technology look like?
In the future, credit cards and card reader technology are likely to evolve. The shift from magnetic stripe cards to smart cards may lead to a preference for chip-and-PIN cards over chip-and-signature cards. Additionally, NFC technology is becoming more popular, leading to more “tap to pay” options.
Q: Can a card be both chip and signature and chip and PIN?
Yes, some card issuers and financial institutions provide credit cards that are both chip and signature and chip and PIN. This allows cardholders to switch between settings depending on their preference or the country they are in.
Q: What are the security advantages of chip-and-PIN payments?
Chip-and-PIN payments provide an extra layer of security by requiring a unique token for each transaction and a personal identification number (PIN) that only the cardholder should know. This provides greater fraud protection compared to older magnetic swipe cards and chip-and-signature cards.
