The Future of Fraud Protection?

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The British are coming, but this time it’s all about a new type of credit card that may change the way U.S. consumers use their plastic. It’s called “chip and PIN” and here’s how it’s set to change your credit card life — if it ever makes it over the big pond.

Typically, the average credit card uses that ubiquitous magnetic stripe (after years of using a mechanical imprint on the front end of the card) to record transactions. While there has hardly been an uproar for change in the way card transactions are processed, the “old” way of using magnetic stripes and numerical imprints to process transactions does leave card owners vulnerable to theft and fraud.

For example, credit cards are physical objects, and can be stolen and used easily. All a thief really needs to do is learn how to forge the signature on the back of the card. Sophisticated “fraud” technologies that enable scam artists to “read” information in magnetic card strips also allow thieves to create cloned cards and debt that won’t be discovered until owners open their next statement.

On Feb. 14, 2006, the U.K. rolled out "chip and PIN" to combat credit card fraud. The idea was a simple one: instead of signing for a card transaction, U.K. consumers were required to enter a four-digit PIN instead, much like U.S. consumers do with debit cards. There was a precedent for using chip and PIN; France had implemented a similar PIN-based system 10 years earlier and subsequently saw credit card fraud fall by 80%, according to UKCreditCards.com.

The security features of the chip and PIN card are two-fold:

  1. The chip processors embedded in the card act as a firewall against counterfeiters. The chip actually replaces the magnetic stripe as the card’s “security vault” that holds all of your personal financial information. It also prevents card thieves from “skimming” data from magnetic stripes and creating a new, cloned card using the stolen information. Without that chip, cards are automatically rejected by U.K. retailers, thus rendering clone cards useless.
  2. The PIN function establishes that the user is the actual owner of the card. Early pushes to use thumbprint identification or eye scanning were rejected in favor of PIN technology. Consumers, the thinking went, were already used to popping in their PIN numbers on bank card transactions, so the shift to credit cards was an easy one.

Now, more than 99% of all U.K.-based credit cards are chip and PIN cards. As long as U.S. cardholders keep their PIN private — and con artists aren’t above getting access to careless card users and stealing their PINs — chip and PIN advocates say that the new cards are a consumer’s best bet against fraud.

With credit card fraud a burgeoning problem in the U.S. — it’s the number one form of identity theft, and 11.1 million Americans fell victim to card fraud in 2009, according to Javelin Strategy & Research — look for chip and PIN to get a thorough look by U.S. card companies in the next few years.

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