The U.S. pay infrastructure is set up so after you swipe your credit card, "the terminal instantly contacts the bank's servers and asks for authorization," says Philippe Benitez, a vice president of secure transactions for Gemalto, a digital security firm that also provides chip-based cards. "This mechanism has worked well for the U.S., and they've been able to keep fraud at an acceptable level for banks."
However, that process hasn't worked as well in other parts of the world where telecommunications is more expensive, so "they decided to prevent fraud by deploying chip technology on the cards," Benitez says. "They basically moved some of the intelligence to the card itself."
Instead of contacting the bank's servers for authorization, the card's chip stores information such as its number and amount of transactions, credit limit and expiration date. The cardholder typically enters a PIN -- separate from an ATM PIN -- instead of signing a receipt, so the user experience is similar to a debit card transaction. Security problems like having card information scanned and stolen through a wallet are not an issue with this type of card -- also called EMV, named for original developers Europay, MasterCard and Visa. "(These problems occurred in) U.S.-based contactless cards that were not fully EMV-compliant," Benitez explains.
First standardized in 1995, chip and PIN credit card technology caught on with version 4.0, which became effective in June 2004. More than 130 countries have adopted the system. The United States is the only holdout among the G-20 nations, according to Benitez.
In fact, a 2009 survey conducted by Aite Group, a financial research and consulting company, found that a majority of cardholders surveyed who had traveled outside the United States within the last three years had experienced some difficulty using a U.S.-issued credit card while abroad.
"This is something we're starting to hear more about from our customers and cardholders alike, but it hasn't reached a fever pitch yet," wrote Sarah Ely, vice president of communications at MasterCard Worldwide, in an email. MasterCard is assessing customer needs, and a few other card issuers are rolling out EMV-enabled cards this year.
The United Nations Federal Credit Union, in New York, and the State Employees' Credit Union, based in Raleigh, N.C., already offer EMV technology to members.
And Chase Card Services announced plans earlier this year to deploy it. It would be the first major U.S. bank to do so.
"Card members who currently have the JP Morgan Palladium card will have the option to request a card as early as June," said Chase Card Services spokesman Rob Tacey. "The chip-enabled cards will be made available to other Chase branded cards and co-branded cards before the end of the year."