EMV Chip CardsHow Chip-Enabled Cards Are Safeguarding Credit & Debit Transactions

December 15, 2022 | 11 min read

EMV Chip

In a Nutshell

You know that little gold square on your credit card? It’s actually a microchip that helps safeguard credit card transactions. More secure than swiping a magnetic stripe, EMV technology has become the global standard for cardholder purchases. But what is EMV, and why is it better?

How Do EMV Chips Work? Do They Really Protect Cardholders Against Fraud?

Just when folks got used to the idea of swiping a credit or debit card to make a purchase, along came a card that must be inserted (or “dipped”)  into a card reader.

Seems it took no time at all to transition from “Please remove card quickly” to “Do not remove card.” But why the change?

EMV (or “chip”) payment cards have become the world’s standard. Still, many people really don’t understand them. In this post, we’ll examine EMV chip technology and how it works. We’ll also explore some of the benefits and challenges of its use.

What Is EMV Chip Technology?

EMV Chip

[noun]/ē • em • vē • CHip/

EMV refers to a type of payment technology first developed in the mid-1990s. EMV-enabled payment cards — also known as “EMV chip cards“ — have a built-in microchip that stores information, encrypts transactions, and facilitates transaction processing.

For many years, a magnetic stripe was the standard way of storing personal data on credit cards. While most cards still have that stripe, chances are that the credit and debit cards you use most often also feature a square “chip” on the front.

That square is actually a computer chip that offers greater security and the option for contactless payments. The letters “EMV” are simply an acronym representing the three companies that created the standard: Europay, Mastercard, and Visa. However, EMV is often used as shorthand for the technology that powers these chips and allows for chip-enabled payments to work (we’ll explore this in a little more detail below).

EMV card chips were designed to decrease consumer fraud while also limiting banks’ liability for fraud chargebacks. EMV-enabled cards can be used for either “chip and PIN” or “chip and signature” transactions. It depends on whether the merchant requires a personal identification code or a signature as a secondary buyer verification. Here’s a look at how they differ:

EMV Chip Cards

Chip-and-signature cards

Cardholder provides a signature on the receipt or on a digital display.

Less secure; merchants don’t always confirm a signature match.

EMV Chip Cards

Chip-and-PIN cards

Cardholder inputs PIN on the card terminal.

More secure as it requires a PIN number to complete the transaction.

How Do EMV Chip Cards Work?

The main difference between EMV chips and magnetic stripes is that, with the latter technology, cardholder data is permanently stored on the physical card. With an EMV chip card, the cardholder creates a unique encrypted code for each transaction.

Magnetic stripe cards work by using optical technology to read the data stored on the card. The card reader then transmits the cardholder information directly. In contrast, chip cards have to be inserted into the terminal.

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When inserted into the terminal, the chip connects to the reader and generates a one-time-use token. This token serves as a stand-in for the cardholder’s personal information.

The terminal transmits the one-time-use token in place of the actual cardholder data. No actual cardholder data ever gets transmitted. As a result, the cardholder avoids exposing their information to potential hackers or data thiefs. And, because chips generate a unique marker for each transaction, it’s virtually impossible to create a usable counterfeit EMV credit card.

Chip cards also offer the ability to make contactless payments. Instead of the card being dipped or swiped, it can be tapped on a specially equipped scanner and read using near-field communication (NFC) technology. This is the same technology used by mobile wallet apps to make contactless payments.

The EMV Chip Transaction Process

Completing a purchase with a chip card typically takes about 7 to 10 seconds. Numerous actions occur during that short span of time, though, both physically and digitally. Here’s a look at a typical process flow:

  • At checkout, the customer inserts their card into the reader. In the case of online purchases, the buyer enters their card details into a virtual system.
  • The terminal identifies whether the card is a debit or credit card (or both).
  • Validation of the card is established through an offline check, and the identity of the user is confirmed using a PIN code or signature.
  • The terminal decides whether the transaction should be sent offline for authorization based on the floor limit (the maximum amount of money that can be charged to that card prior to authorization).
  • Using issuer rules, the card performs its own risk assessment, deciding whether to complete the sale online or offline (or to reject the transaction altogether).

As we said earlier, all of this happens in the span of a few seconds. From there, a transaction request is transmitted to the payment authorizer, along with transaction specifics. This involves the creation of an Authorization Request Cryptogram (ARQC) that acts as a digital signature. The ARQC is verified and sent back to the terminal.

As we can see, the data is always encrypted at every phase of the transmission. This makes the process more secure than other methods of payment.

What Are the Benefits of EMV Transactions?

Chip cards have a lot to offer both merchants and consumers:

Security

EMV chips use far better encryption and create single-use codes for each transaction. Even if a hacker managed to successfully copy an EMV card, that card would be useless for further purchases. Merchants deal with less fraud, which ultimately helps keep prices lower for consumers.

Global Usage

In most countries (the US being a major exception), EMV transactions typically use a “chip-and-PIN” method, even for credit cards. That said, many merchants will still allow consumers to make purchases using a chip-and-signature card. So, cardholders with EMV-enabled cards should have no problem finding merchants able to process transactions for them even while traveling.

Offline Verification

EMV supports offline transaction verification, enabling some EMV transactions to be processed without internet connectivity. Again, this doesn’t always work with magnetic stripe cards.

Contactless Options

At NFC-enabled terminals, EMV technology can also be used for contactless payments, using mobile wallet apps like Apple Pay or Android Pay. Some newer readers offer mobile payment options, as well.

EMV technology protects customer data, but for merchants, it’s only one piece of a comprehensive fraud prevention strategy. Let us show you why.REQUEST A DEMO

Finally, remember that EMV chip cards still sport a magnetic stripe as well for the time being. This means they can still be swiped for use with non-EMV terminals if necessary. This can be an easy fix if the card is declined because of a problem with the card chip.

Can Fraud Still Happen While Using an EMV Chip Card? Who is Liable?

Here in the US, an event called the EMV Liability Shift occurred back in October 2015. Prior to this, banks bore financial responsibility for counterfeit card transactions. After the shift, liability now passes to wherever is the most technologically vulnerable point in the transaction process. This typically means the merchant.

The card networks reasoned that since chip cards are so much more secure, it wasn’t fair to punish the bank if the merchant didn’t upgrade. They decided it was more equitable if the liability shifted to the least-secure party.

Now, if a merchant completes a transaction using less-secure magnetic stripe technology, and that transaction turns out to be fraudulent, the merchant will be responsible for reimbursing the cardholders. The networks even created new chargeback reason codes specifically for this type of fraud:

  • Visa Chargeback Reason Code 10.1 — EMV Liability Shift Counterfeit Fraud
  • Visa Chargeback Reason Code 10.2 — EMV Liability Shift Non-Counterfeit Fraud
  • Mastercard Chargeback Reason Code 4870 — Chip Liability Shift
  • Mastercard Chargeback Reason Code 4871 - Chip Liability Shift – Stolen Card
  • Amex Reason Code F30 — EMV Counterfeit
  • Amex Reason Code F31 — EMV List/Stolen/Non-received
  • Discover Reason Code UA05 — Fraud/Counterfeit Chip Transaction
  • Discover Reason Code UA06 — Fraud/Chip-and-Pin Transaction
Learn more about chargeback reason codes

The new rules apply both to merchants who have an EMV-enabled system and those who haven’t switched over yet. Merchants with chip-capable systems are still responsible for making sure cards are dipped whenever possible. However, if the merchant has an EMV system, and it was used during the fraudulent transaction, liability shifts back to the issuer.

Are There Any Downsides to EMV Cards?

Despite the plethora of pros, EMV chip cards are not perfect. There are still a few downsides to consider, including:

Digital Security

Security is one of the top benefits of using chip cards… but that only applies to card-present transactions, where the chip is actively engaged. Online purchases aren’t really protected. Plus, if unencrypted transaction data is stored on a merchant server, a smart hacker may still be able to use it with a stolen EMV card.

Speed

A complete EMV authorization typically takes 7-9 seconds. While that’s not much, it can still take noticeably longer than swiping a card. That could potentially cause frustration and annoyance for cardholders.

Liability

Merchants can’t let down their guard just because they have EMV-enabled terminals. They’re responsible for ensuring that enabled cards are dipped, not swiped. That may require extra employee training as well.

Chargeback Abuse

While EMV chips help decrease counterfeit card fraud, they aren’t much help against first-person fraud (i.e. friendly fraud), which occurs during the post-transaction phase.

The Future of EMV Cards

EMV payment cards represent the future of payment processing. Increased security and more options benefit both consumers and merchants. Fewer fraudulent transactions mean retailers save money, and those savings should trickle down to shoppers in the form of lower pricing.

Also, the potential of EMV technology is far from fully realized. The next generation of chip cards will likely include a variety of possible features, from personalized couponing to loyalty programs built right into the card. 

Exciting as that may be, however, there is the chargeback issue to consider. Chip cards simply aren’t designed to prevent customer disputes. Effective fraud management requires a comprehensive strategy that involves both prevention and revenue recovery. For more information, contact Chargebacks911 today.

FAQs

What is the meaning of an EMV chip?

EMV refers to a type of payment system developed jointly by Europay, MasterCard and Visa in the mid-1990s. EMV-enabled payment cards – also known as “chip cards“ – have a built-in microchip that stores information, encrypts transactions, and facilitates transaction processing.

How do EMV chips work?

With an EMV card, the embedded microchip creates a unique code for each transaction. The payment is processed using this one-use-only code, rather than the card number printed on the card. This is a practice called tokenization.

Are all chip cards EMV?

Yes. No matter what terminology banks or merchants may use — EMV card, chip card, smart card, etc. — they’re all different names for the same thing. Any payment card with an embedded chips is using EMV technology

Is EMV the same as RFID?

No. Most EMV chip cards require physical contact with a payment terminal. Radio Frequency Identification (RFID) cards only have to be near the terminal. Depending on signal strength, they may not even need to be removed from a purse or wallet.

Some modern EMV cards are integrating NFC technology, which can be used for contactless payments as well, offering the best of both worlds.

Can EMV chips be hacked or cloned?

Technically yes, but only the information from the magnetic stripe can be captured. That means any clone of the card would only work with non-EMV-enabled readers.

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