Science Questions

Why do US banks not use chip and pin?

Sat, 1st Sep 2012

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Katherine, Twitter asked:

Why do US banks not use chip and pin?


Steven -   So, US banks currently donít use chip cards, but they are increasingly doing so.  The main reason they are not or up until recently is not a technical reason, but economic.  The US banks make more money when a customer signs for transaction, rather than enters in a PIN and it got so ridiculous that a US bank, which was also had UK branches was saying to their UK customers, use the PIN its safer and telling their US customers pen not PIN, signature is safer.


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I try to minimize my credit card use (PIN or Signature) just to minimize expenses, even if I rarely actually see the difference.

I wonder if there is a technology gap.  The USA started using credit cards...  hmmm, perhaps 60 years ago.  But, magnetic strip readers have been included in the cards, and widely utilized for as long as I can remember.  The old duplicate card impression machines are loosing favor though.

Incorporating smart card technology may not buy them much over the magnetic strips, and would mean replacing the entire network of magnetic card readers, ATM machines, and just about everything else. 

The banks might update their technology, and slowly replace the cards as they expire.  But, the retail institutions would not be happy about having to fork out thousands of dollars of extra dough for the upgrade.  CliffordK, Wed, 5th Sep 2012

I read a recent article in The Economist where they claimed that a main reason for the lack of an upgrade is that the US card companies estimated the cost of upgrading was higher than the expected savings from a reduction in fraud.  jpetruccelli, Wed, 5th Sep 2012

Personally I've always thought that signatures are pretty foolish as one should be able to get a forgery close enough to fool all but the most astute experts.

It is likely that the expenses would also hit different organizations.

If the banks have the liability for the fraud.
But the businesses must pay to upgrade the infrastructure.

There would be no benefit for the majority of the businesses to do the upgrade unless forced to do it.
And, aren't smart cards more expensive than magnetic strip cards?  Who is going to pay for the more expensive cards?

I know that magnetic strip cards get demagnetized periodically.  Are smart cards more durable?  Durability could make or break such a planned upgrade.

I doubt it will help much with internet fraud unless people start incorporating encrypted smart card readers in their computers, something that would likely open a whole new can of worms.

Are there upgrades to the smart cards in the pipeline?  Smarter smart cards?  How will that affect the infrastructure?

One might also notice that the USA has a very high portion of the people with both magnetic strip credit cards, and WWW access with their computers.  And, thus there is less of a need to do cell phone banking, or point of service cell phone purchases.  Thus, we also lag far behind other countries with Cell phone banking. CliffordK, Wed, 5th Sep 2012

The chips are under a cent each in volume, so this adds very little cost. Replacing a few million terminals though will cost. At present the card and sign puts the onus on the merchant to verify the signature ( though very few do) while Chip and pin puts the onus on the consumer. The winner in both is the bank, the cost of fraud is either borne by the merchants or the card owner, not the bank. SeanB, Wed, 5th Sep 2012

Here's the article:

The short of it is that customers in the US are on the hook for only the first $50 of any fraud. The card-issuing banks generally eat the rest of the cost.  They don't upgrade their cards because there's no infrastructure to handle the upgraded cards, and they'd lose customers if they required chip-and-pin, since there are few places to use it.  The US card market is incredibly competitive.  They could put chips in cards while still allowing signatures, but that would be wasted money since merchants won't upgrade to chip-and-pin systems because of the expense.

Apparently Visa is trying to convince merchants to upgrade by not requiring them to undergo costly yearly security checks of their machines if they upgrade and once it becomes mainstream enough, they'll shift liability for fraud due to signature-based transactions to the merchants, giving even the hold-outs good incentive to switch to chip-and-pin. jpetruccelli, Wed, 5th Sep 2012

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