Once upon a time, customers would walk into a store, choose what they’d want to buy, and pay through one method: cold, hard cash. However, long gone are the days where only “cash is king”. Now, 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 expecting cash to go away anytime soon would be foolhardy, 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, the technology that’s behind them, to even what they’re not. Keep reading to find out more.
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. Chip and signature cards do not utilize NFC technology.
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 reason your card may still have a magnetic stripe is that within the U.S., the transition to exclusively using EMV technology still isn’t complete.)
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. 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, unique ID.
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.
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 the 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 will be 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. Let’s look at a quick example to make it easier to understand.
Say you have a customer who’s about to checkout and pay for their purchase. With chip and signature payments, they’ll insert the card into your EMV terminal so it can read the microchip, then provide a signature, just like with swipe cards.
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.
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 cards also provide added benefits for retailers and business owners: unlike with older magnetic swipe cards or chip and signature cards, which require you to keep paper records to verify signatures in the event of fraud, everything is stored electronically. 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 U.S. Government decided there would be a liability shift: in the event of credit card fraud, whichever party was least EMV compliant would be held liable.
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. That said, management consulting firm Kearney noted that within the U.S., under 4% of active cards are contactless, meaning adoption still has a long way to go.
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.