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An Aside

posted by Stephen Lubben

Payment systems are not usually my beat, but returning from a conference this morning, I was againIMG_1062 subjected to the continued stubbornness of the U.S. credit card companies regarding "chip and pin" technology, so it seems like a good time to rant. 

I arrose at 6am and made my way to the Luxembourg RER station, to catch the train to the airport. The ticket machines at this station do not accept cash -- not even coins -- and they are the older type, which means they also don't accept U.S. credit cards because we don't have a "smart" chip in our cards. Once again I was stranded at a European train station by this issue -- the last time was in Amsterdam, where, ironically, my INGDirect debit card was rejected.

Of course this is hardly the most pressing social issue of our times. But it also presents something of a puzzle, since the effect has been to encourage me to bring more cash and not rely on my debit or credit cards when I travel. Other than train stations, this typically fixes the problem, but in a way that seems unlikely to be optimal for credit card issuers. The technology is hardly the issue -- my building's laundry room has been using similar cards for years, so that can't be it. And if the issue is the cost of providing the necessary equipment to US merchants, why not let frequent travelers have the option to at least have the cards so they can use them abroad?

One credit union is doing just that, but I can't figure out a way to become eligible for membership. Meanwhile, the rest of the US banks continue to annoy their customers and encourage us to leave our cards at home.

Comments

It was infuriating to arrive at CDG after a long transatlantic flight, walk to the train station, and find ticket machines that only took chip and pin cards or cash, and no ATM anywhere.

I'm glad they don't have Chip & Pin. The security for that is notoriously weak.

How about don't ever use credit cards or debit cards at all? Just do everything with cash. I learned of using this method after filing for bankruptcy, and ever since I wanted to get a good handle of my finances, I have cut up all my credit and debit cards.

I had the opposite experience, so to say. In the Netherlands, debit cards + PIN are used extensively. When on vacation in Scandinavia we found out that unmanned petrol stations nearly always rejected my debit card, even though they had the Maestro logo. We were very glad we had a credit card (Master Card) as back-up.

What on earth are you talking about King Rat? Chip & PIN security isn't perfect, but it's light years beyond signature and magnetic stripe. If you doubt that, see how easy it is to purchase lunch with your friend's debit card.

The short answer for why no Chip & PIN in the US is that card issuers don't want it. (MasterCard rules allow Chip & PIN to be mandated by a 75% issuer volume vote in a region.)

(1) Interchange revenue is higher for signature debit, so no reason for issuers to favor PIN debit.
(2) Issuers don't want to incur the costs of reissuing cards. Chip cards aren't particularly expensive, but figure that reissuance costs a few dollars per card (making the new physical card, mailing it, and activation/deactivation), so if there are 300 million cards in the US, we're looking at upwards of $1 billion in reissuance costs. This can be eased through a phased replacement of old cards as they expire, as in Canada, but it's still a cost.
(3) issuers don't bear most fraud costs, so they aren't generally incentivized to go with the highest security levels.

Add in to this that merchants don't want to pay for Chip card readers, and I think that's most of the explanation.

I think we'll see Chip & PIN soon enough. Lack of C&P in the US is creating an international fraud arbitrage problem (bring a C&P card to the US and it's defenseless), and issuers with high international volume, like Amex, are going to feel increasing consumer pressure. Of course, depending on how fast we see mobile take off, we might just bypass C&P cards altogether.

Ross Anderson details the problems with Chip & PIN here: http://www.lightbluetouchpaper.org/2010/02/11/chip-and-pin-is-broken/

Sounds to me like the main advantage of C&P for UK (at least) banks is that it allows them to push fraud liability back on to the customer. I don't know if that would work under US regulations; it may be why US banks aren't interested.

Chip and Pin is not widespread because fraud rates are much lower, in many third world or developing countries chip and pin, it is not only a cost issue but a terminal issue. Although signature debit revenue is higher than pin debit revenue , this is not the reason for this and it is a bit misleading, first pin debit is different from a credit card transaction, it is an online debit transaction and is not compatible with credit cards, signature debit is a credit card with debit on the client side. You cannot reverse of obtain pre authorizations with pin debit, so its no substitute for credit and signature debit unless you are a retail store or merchant who can manage those transactions for you (which is one reason pin debit is not accepted online as credit/signature debit).

Credit card companies bear most of the credit card fraud costs in card present transactions, card not present is different although there is mastercard securecode which can transfer liability. Not all chip and pin technologies work online so an online transaction may be completed without a pin although this may be changing.

I think emv may eventually be adopted or other techniques, it may not be hard, if you go to a vending machine or self checkout, they may ask for your zip code to complete a transaction, they may not ask for it all the time and a stolen license or address may make it useless, nevertheless the asking for your zip code means if not chip and pin, other techniques can be adopted then just the magnetic/signature reading.

I shall add, even if you don't have an EMV card, you may still be allowed to do a transaction, not many merchants may have awareness on this however.

US banks continue to annoy their customers and encourage us to leave our cards at home.....

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