Are magnetic strip cards becoming an endangered species?

The United States and some non-industrialized countries in Africa are using outdated technology for credit and debit cards. They are using stored unencrypted data on a magnetic strip on the back of the card, which has been in existence since the 1970’s.  It is cheap and easy for thieves to copy.

Many countries have or are moving to smart cards known as EMD, which use multi layers of security to protect the cards from abuse.  The card contains a chip that stores and transmits encrypted data, with a unique identifier that changes with each transaction. Some are set up with PINs to authorize credit and debit transactions, the so-called “pin and chip” card. Countries that use this type of card experienced a decline in credit card fraud.  For example, in the first year France introduced the more secured card in 1992 fraud losses dropped by 50% and card counterfeiting by 78%.

It is becoming more difficult for U.S. travelers in other countries.  The American cards won’t be universally accepted everywhere anymore as a “swipe” transaction.  China will no longer produce or accept the magnetic stripe cards after 2015 and The European Central Bank recommended that banks stop issuing magnetic stripe cards after 2012.

The U.S. is behind on switching to smart cards, because the cost of the switch is more than the fraud losses.  According to George Peabody, principal analyst at Mercator Advisory Group,  which consults the banking and payments industries, replacing all payment cards in  the U.S. could cost issuers $2.85 billion plus $310 million to update the ATMs. Merchants could spend $2.64 billion to replace sales terminals.

Mercator reports estimated credit and debit card fraud losses at $2.4 billion in the U.S.  Merchants usually absorb losses for fraudulent transactions conducted by mail, phone and online; card issuers take the loss for those in walk-in stores.  Merchants claim that banks often charge back the losses to them.

The good news is that Kroger, McDonalds, Sears and Walgreens are for the change.  Best Buy, Home Depot and Wal-Mart are in the process of purchasing terminals that can read contact, contactless chip and pin technology.

We will watch to see what happens with smart card chip technology.  If we don’t switch, we will not only be behind most of the countries, but U.S. travelers won’t be able to use credit cards in most countries.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

Categorised in: Credit Cards, Identity Theft, Money & Identity

This post was written by John Ulzheimer