US banks and merchants may finally shift to a more secure way of authorizing credit card transactions in which customers will enter a personal identification number (PIN) at checkout instead of signing a receipt.
The US is the last major market in the world using the signature system, which is part of the reason why a disproportionate amount of credit card fraud happens here. The change is especially relevant given the massive fraud perpetrated against customers of Target in the fall. During a Congressional hearing last week, Target CFO John Mulligan said the company is accelerating the $100 million effort to switch to the so-called "chip and pin" system.
The change won't happen all at once
The change won't happen all at once. Banks must issue cards with microprocessors and merchants need the right equipment to process the so-called "chip and PIN transactions," which is likely to happen gradually. Additionally, the new equipment also processes "chip and signature" transactions, which are less secure but more convenient. So far, many banks have opted to issue chip and signature cards rather than chip and PIN cards.
There is pressure to adopt the more secure system, however. Visa, American Express, and MasterCard have announced that banks and merchants that are using less secure technology for face-to-face transactions by October 2015 will be liable for fraudulent purchases. If a customer has a chip and PIN card but the merchant doesn't have a new terminal for it, the merchant is liable for any fraud. And if a merchant has a terminal capable of processing chip and PIN cards, but the bank has not issued a PIN-enabled card to the customer, the burden of liability for fraud shifts to the bank. That's a strong incentive to get up to date.
Signatures are so easy to forge — and cashiers so remiss in checking for them — that they're considered a fairly insecure method of authentication. But the chip and PIN system is also not without critics; researchers say thieves could potentially harvest the codes through point of sale systems and ATMs.
The new system will also prepare merchants and banks to transition to contactless payments in the near future, which will bring a host of new security challenges.
Correction: This article has been corrected to reflect the fact that many banks are opting to issue chip and signature cards over chip and PIN cards.