If you’re asked to insert rather than swipe your credit card when you go to pay, you’re using a chip credit card. A credit card chip is a small gold or silver microprocessor that’s embedded in the card and intended to offer greater security for your transactions.
Credit card chips are growing dominant in the plastic payment market. According to data from Emvco.com, credit card chips — also known as Europay, MasterCard, and Visa (EMV) chips — comprised about 90% of global credit card transactions in 2021. Read on to learn more about how the credit card chip works.
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What Is a Credit Card Chip?
Credit card chips are small microchips embedded in the card that collect, store, and transmit credit card data between merchants, their customers, and participating financial institutions. Each time you use a credit card to make a transaction, these chips generate a unique code that can only be used for that transaction.
Chip credit cards date back to the mid-1990’s, when the three titans of card payment technology — Europay, MasterCard, and Visa — collectively rolled out the first chip-based credit card to the masses. Also known as EMV chips, credit card chips were introduced as a way to enhance payment security over the existing magnetic-strip credit cards.
Today, chip makers are planning huge expansion as chip credit cards continue to grow in popularity. Contactless credit cards are another advancement underway.
Magnetic Strip vs Chip Credit Cards
Magnetic-strip cards hold data on the magnetic strip that appears on the back of payment cards. Because these strips hold all of a cardholder’s information needed to make a purchase, this type of card is an easy target for thieves.
With industry-wide concerns over data fraud linked to magnetic stripe cards, credit card companies turned to advanced computer microchips as a solution to credit card data security problems, using EMV technology.
Chip-based payment cards have a big advantage over magnetic-strip cards, as each card payment transaction generates a unique data code. Because the chip’s code is a “one-and-done” feature that disappears after the transaction is completed, even if data fraud criminals uncover the code, they can’t use it for future transactions.
How Does a Chip Credit Card Work?
Chip credit cards don’t work on a standalone basis. Merchants who want to conduct card payment transactions need payment processing tools, like card terminals and mobile scanners, that are compliant with EMV chip industry standards.
When a consumer inserts a chip credit card into a payment terminal (unlike with a contactless payment), and follows the on-screen prompts to complete the transaction, the chip and the terminal exchange the needed data in an encrypted code. That code is then used to transmit the transaction details to the acquiring bank, which quickly reviews the transaction.
After the cardholder’s financial data is authenticated and it’s determined the consumer has the funds to cover the purchase, the payment software may run fraud filters to further authenticate the user and the transaction.
Then, the transaction is approved by the acquiring bank (or declined if the consumer doesn’t have the funds to cover the purchase, or if fraudulent activity is suspected). The appropriate transaction confirmation codes are relayed back to the EMV payment device in real time, thus concluding the transaction.
Assuming the transaction is approved, the embedded card chip transmits the approval to the cardholder’s bank, which releases funds to pay for the transaction and sends it to the acquiring bank. The transaction is then settled by the merchant’s payment provider and deposited into the merchant’s bank account.
Types of EMV Cards: Chip-and-Signature vs Chip-and-PIN
There are two main types of chip-based cards:
1. Chip-and-signature cards: The most widely used form of EMV card in the U.S. is the chip-and-signature card. With these, the cardholder simply inserts the card into the point-of-sale terminal and then provides their signature to verify the transaction.
2. Chip-and-PIN cards: With a chip-and-PIN card, the cardholder is asked to enter a four-digit PIN, or personal identification number, at the point-of-sale. That process authenticates the user and allows for the card transaction process to be completed.
While each type of chip-based payment card model serves the same function — the safe and efficient completion of a transaction — chip-and-pin cards may be the safer alternative.
That’s because with a chip-and-signature card, the cashier or front-of-the-store service provider may not ask to see the back of the card to manually authenticate the signature. That gives fraudsters a leg up, since their signatures may not be checked. With a chip-and-pin card, on the other hand, the thief would need to know the credit card PIN to complete a transaction.
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Protecting Yourself From Credit Card Fraud
While chip-based credit and debit cards have been a game-changer in improving payment security, card thieves still have ways to either steal your card or lift sensitive personal data from a payment card.
Here are some ways you can protect yourself against credit card fraud:
• Review your card statements. One of the important credit card rules to follow is checking your card statements regularly for potential security issues. If something looks suspicious, immediately contact your credit card issuer. In the case of unauthorized charges, report the fraudulent activity and follow the steps recommended by the card company, which could include freezing the card temporarily or getting a new card.
• Keep physical possession of the card at all times. A cardholder’s best defense against physical card theft is to always know where their card is and only carry it when needed. It’s also a good idea to avoid storing your card account number on a digital device — particularly sensitive information like the credit card CVV number — that could be stolen by a savvy cyber thief.
• Shred any documents that contain sensitive information. To further protect your account information, shred physical payment card files that include your credit card or account number once you’ve paid your monthly bill. Better yet, sign up for paperless billing, so there’s no paper trail at all.
• Watch out for email scams. Steer clear of “phishing” scams, i.e., fraudulent emails or texts pretending to be from trusted retailers and financial institutions. If you receive an email requesting sensitive information, reach out to the company directly using the contact information listed on their website or on the back of your card.
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As you can see, the introduction of credit card chips has greatly increased the security of credit card transactions. Credit card chips generate a unique code for each transaction, and that code cannot be used for future transactions. This makes it harder for thieves to intercept your personal data — though that doesn’t mean credit card fraud isn’t still possible.
When choosing a credit card, it’s important to consider the security features the card offers alongside other perks, like cash-back rewards. The SoFi credit card, for instance, offers Mastercard ID theft protection to help protect your personal information through the detection of potential fraud.
What is the chip on credit cards?
A credit card chip is a microchip embedded into a credit or debit card that securely stores transaction data. This helps to facilitate safe and efficient payment card transactions.
Are chip-and-signature cards as safe as chip-and-PIN cards?
Not necessarily. That’s because the merchant may not verify the signature provided against the one on the back of the card. This means it may be easier for thieves to get away with signing on behalf of the actual cardholder. It’s likely more difficult for a thief to get ahold of a cardholder’s PIN.
Do all retailers accept EMV cards?
A high percentage of global retailers accept chip-based credit and debit cards. Industry figures show that EMV chip cards comprised roughly 90% of the global credit card transaction market in 2021.
Is dipping or contactless credit cards safer?
Both are secure ways to make transactions. That’s because both contactless and chip credit card transactions generate a new transaction code for each purchase.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
The SoFi Credit Card is issued by The Bank of Missouri (TBOM) (“Issuer”) pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
Third-Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Photo credit: iStock/Georgii Boronin