European banks consider magnetic stripe card ban

The chairman of the European Payments Council (EPC), Gerard Hartsink, recently announced that European banks may consider a ban on magnetic stripe cards by 2011, as widespread adoption of chip-and-pin credit cards continues to flourish. The EPC, established in 2002, is driving the transition to the Single Euro Payments Area and advised its members to stop accepting magnetic stripe cards. The technology is deemed less secure than the EMV alternative, an international standard specifying how smart card chips can replace the magnetic stripe on bank cards.

The decision to discard magnetic stripe cards altogether could have serious implications for U.S credit card merchants, who use magnetic stripe technology over chip-and-pin. While Europe made the switch to Chip-and-PIN in 2004, largely due to the fraud protection benefits, the reluctance of the U.S to follow suit has left them lagging behind in credit card technology. So it too late for the U.S industry to make the switch, and how will this affect American travellers?

Well, U.S citizens travelling with their magnetic stripe cards can rest assured – European Chip-and-PIN readers are capable of processing magnetic stripe cards as well. So any horror stories you may have heard (i.e. Joe Weiss, the U.S attorney who couldn’t use his card anywhere in France) are either a case of fear mongering, or an unfortunate rarity. Across the pond, the challenge lies in the cost and complexity of making the transition to EMV technology. Chip-and-PIN cards are processed using different terminals than those used for magnetic stripe cards. In Europe, the issuer is involved with the payment, as EMV uses ‘smart card’ technology which renders the card powerless without a PIN. However, in the U.S, issuers are separated from the payment processing system and subsequently are in no position to force merchants to purchase the new Chip-and-PIN terminals.

Another stalling point is the complexity of America’s multilayered payment system. Frankly, converting to Chip-and-PIN just wouldn’t be as simple as it was in Europe. Even with the inflated costs, the switch made sense for Europe as EMV technology dramatically improved efforts in preventing credit card fraud. Europe’s system is essentially offline, which means that transaction information isn’t instantly updated when a purchase is made. As a result, credit card fraud can’t be detected at the point of sale.

The U.S system is online, so fraud is more frequently detected at the point of sale and suspicious activity can be flagged. Some experts argue that the reason the U.S is less hasty to adopt smart cards is because the risk of fraud is significantly lower than in Europe – where fraud detection isn’t possible until after the event. Yet, there is conflicting evidence that suggests international credit card thieves are beginning to target the U.S. According to the U.K. Payments Administration, growth in credit card fraud cost the UK consumers £535.3m in 2008. In comparison, fraud and identity theft cost the U.S $48 billion – a vast difference.

Last year, eleven fraudsters stole 45 million credit and debit card numbers from companies such as TJX, Boston Market and Barnes & Noble – the biggest case of identity theft in U.S history. Then, in 2009, Heartland Payment Systems were targeted, and millions of card transaction details breached. Even the hackers themselves aren’t safe! In a twist of delicious irony, criminal hackers pulled off an ATM ‘skimming’ scan at the annual Defcon conference in Las Vegas, a meeting of hackers from all over the world. It seems nobody is immune to the threat of identity theft.

The decision for card issuers in the U.S is a tough one. The switch to Chip-and-PIN is not an easy one, but after significant data breaches which resulted in millions of cards being compromised, and issuers, banks and consumers all suffering, it would seem that a solution is drastically required. American credit card companies are already sharing higher costs driven by the increase of data breaches and online crime. For those reasons, it’s about time issuers reconsidered the economics of EMV migration.

(Smartcard News Ltd, 2009)