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The chip card is taking over

EMV—which stands for Europay, MasterCard and Visa—is a global standard for cards equipped with special computer chips allowing for better protection against fraudulent in-person card transactions.

European banks have been issuing credit cards with chips for years. Finally, the US is catching up. (As a business, no doubt you've seen them already—you might even have a chip card reader.) First introduced in the United States in 2014, the chip cards will rapidly become the new standard in card processing. By the end of 2016, the vast majority all credit and debit cards issued in the US (about 76%) will contain an EMV chip. By the end of 2018, it is expected that over 98% of all cards issued in the US will be chip cards.

What does that mean for you as a business owner? Well, a lot. Below is some information that will help you learn what is required of you as a business, and when.

Out with the old (mag stripe)

Before the introduction of the EMV chip, all card-present transactions used a magnetic stripe (aka mag stripe) on the back of the card. Swiping the card through the terminal allowed the payment gateway to read and transmit the credit card account information, which is encoded on the stripe. With the mag stripe cards, any fraud was usually assumed by the issuing banks, as the fraud controls were relatively sparse, relying mainly on a comparison the signature on the card against a signed receipt by the merchant.

In with the new (EMV chip)

With the new EMV chip-enabled cards (aka chip cards) a special silicon chip is embedded into the plastic. When used in card-present transactions (where you take physically possession of the customer's card to process the transaction), the chip creates a single-use, unique transaction code. This code is sent to the issuer where it is verified, allowing the transaction to proceed.

Chip-and-signature vs chip-and-PIN processing

There are two different methods of processing a chip card transaction: chip-and-signature and chip-and-PIN. Both require the chip card to be inserted into the card reader and use the chip's unique transaction code. Chip-and-signature cards still require a customer's signature on the receipt, and businesses are advised to continue to check the signature against the one on the card. Chip-and-PIN processing adds another level of protection by requiring a customer to enter his PIN code into the card reader.

Chip-and-signature processing is currently being used in the United States, while chip-and-PIN processing is done in Europe. However, there have been some signs from the associations that the US will eventually transition to chip-and-PIN processing, as well as interest from retail associations for PIN authentication.

Chip-enabled card readers

As we mentioned above, all chip cards require the use of new card readers. These new readers have a slot in which the customer or merchant inserts the chip card. Unlike mag stripe cards, which are quickly swiped, the chip card remains in the reader throughout the entire transaction, transmitting the unique approval code request and receiving approval to proceed with the transaction.

Chip card readers, such as the PayPal Chip Card Reader, are backwards compatible, meaning that you can continue to process traditional mag stripe cards. You can also process NFC (Near Field Communications) payment options, such as Apple Pay. An added benefit of the PayPal Chip Card Reader is that it helps you future-proof your business: it has a PIN pad, so that once the US does move to chip-and-PIN processing you'll be good to go.

"With the rollout of the new chip card reader we can now offer our merchants options that fit their business needs from how their customers want to pay to the level of risk that they are comfortable with. And with the built in PIN pad, our chip card reader will let our merchants seamlessly transition to PIN based transactions when the US markets move to that new standard without having to upgrade their equipment again."
—Wyatt Hunter, PayPal Here, Senior Marketing Manager

EMV cards and fraud

In an effort to spur businesses to transition to EMV chip card processing, MasterCard, Visa, Discover and American Express began in October 2015 to shift the liability for any card-present fraud to whichever party is the least EMV-compliant in a fraudulent transaction. What does that mean? It's a bit confusing but fortunately, it's a very specific case: if someone puts a fake EMV chip on a credit card, and shops in your store and you swipe that card (as you do with current mag stripe cards) instead of inserting it into the chip slot, you could be on the hook.

The upside to this is that chip cards are more secure than the old-fashioned mag stripe cards, curbing the potential for fraud (and hopefully, associated costs) for all parties involved: for the issuer who approves the transaction, the network that routes it, the merchant who processes it, and the consumer who initiates it.

To learn more about how PayPal can help you jump start EMV card processing, visit http://www.paypal.com/emv today.