Smart cards that have curbed fraud in Europe to be used more by U.S. retailers

January 23rd, 2014

Over the holiday season, a massive data breach hit Target Corp. that affected 40 million credit and debit card accounts. A computer-based attack compromised the credit card data, representing one of many recent incidents exposing the risk of fraudulent credit card purchases.

The Wall Street Journal reported earlier this week that Target’s Chief Executive Gregg Steinhafel is calling on retailers and banks to adopt chip-based credit card technology to better protect shoppers.

A chip-based credit card is a credit card in which a smart chip in the card works with special credit card readers installed at stores that take the cardholder information and turn it into a unique code for each transaction.

These cards also often require cardholders to enter a PIN in order to order to authenticate the purchase. This technology would not have prevented the security breach at Target, but would have made it more difficult for counterfeit cards to be created to make fraudulent purchases with.

Smart cards would not eliminate credit card fraud entirely. The technology would not prevent thieves from using cards online, where people type their credit card numbers to make purchases.

These smart cards are being used in more than 80 countries, with more than 1.5 billion smart cards in circulation, according to Smart Card Alliance, an industry group that promotes their use. Adoption of these cards in Britain has helped reduce fraud from counterfeit cards by 70 percent from 2007 to 2012, according to the U.K. Card Association.

Meanwhile in the U.S., data breaches of financial card information that affected more than 5,000 retailers have doubled since 2007.

Rick Oglesby, a senior analyst at Aite Group LLC, a Boston consulting firm that specializes in the payments industry, said, “A lot of the fraud has migrated from international markets to the U.S. because the U.S. is the weakest link.”

The introduction of smart cards is not something new to retailers and banks in the U.S.  Ironically, Target tried to roll out smart cards for the industry from 2001 to 2004, and spent $40 million dollars doing so. However, the rollout was halted because Target’s executives responsible for store operations and merchandising, including Steinhafel, were worried that the technology slowed their checkout speeds and didn’t offer enough marketing benefits, according to the WSJ.

John Mulligan, Target’s chief financial officer, stated, “A review of the program led the leadership team to agree that there were potential operational, financial and marketing benefits. However, without broad industry adoption of the technology to ensure a consistent guest experience, there weren’t enough benefits at that time to continue the test.”

U.S. retailers are expected to have adapted  systems that accept smart cards by October 2015, when credit  card companies plan to hold merchants financially responsible for any fraud that stems from a transaction in which a chip-enabled card was presented but couldn’t be used. This is regardless of whether the banks and credit card companies are willing to pay to issue them or not.

Information from The Wall Street Journal was used in this article.