Personal Finance

Credit cards now come with a chip embedded

Chip in your wallet

You may have recently received a new credit card or debit card with a computer chip embedded in it. It's part of a nationwide shift by major card issuers to offer added security against fraud—and shift the liability from card issuers to merchants, if they do not upgrade to this technology by Oct. 1, 2015.

But will this new technology really help protect consumers and reduce the costs of fraud? In the U.S. alone, credit and debit card fraud costs were $16 billion last year, according to Javelin Research.

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So card issuers are taking action to make it more difficult to counterfeit cards. By the Oct. 1 deadline, credit card companies and retailers will shift to "smart cards" using a new technology called EMV—which stands for Europay, MasterCard and Visa, the three companies that created the standard for processing payments. But not all companies will be able to comply by this date. And many consumers may have yet to activate their new EMV chip cards.

About 120 million Americans have already received the card though, and that number is expected to grow to 600 million by the end of the year, according to card comparison website

Making it harder to counterfeit

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The microchip on your credit or debit card helps make it more difficult for fraudsters in two important ways. "It makes it harder to physically counterfeit the card and it creates a unique transaction code that's passed to the merchant every time you make a purchase with the card. So that means the merchant will have a lot less of your useable data and instead will have this unique transaction code," according to Matt Schulz, senior analyst at

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Stealing a unique transaction code and using it for fraudulent purchases is like having an expired password: it won't do anyone any good. But while new chip cards can protect you from what's known as "card--present" fraud—where perpetrators are using physical counterfeit cards—the technology has yet address online fraud. That makes up an estimated 16 percent of total fraud losses of credit and debit cards.

Analysts predict that credit card fraud at brick-and-mortar retailers will fall after the introduction of chip-enabled cards. Still, online fraud is expected to rise, as more merchants gradually get on board with the new system. Research and consulting firm Aite Group estimates U.S. online card fraud will more than double to $6.4 billion from $3.1 billion between 2015 and 2018.

Dip instead of swipe

Upgrading terminals to read the chip cards can run $200 to $1,000 per device, according to the Federal Reserve Bank of Chicago.

For many small businesses, this could be a hefty expense, thus delaying the transition. And as of Oct. 1, if fraudulent activity occurs at a retailer that has yet to upgrade its system to accept chip technology, then the merchant—not the card issuer or payment processor—will be held liable.

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"It's really the driving force behind the move," Schulz said.

As for consumers, perhaps the biggest change will be the end of swiping. Instead, you'll dip your card into the terminals for each transaction—and may have to sign or enter a PIN to complete the purchase.