Are smart cards really a smart idea?

Credit and debit cards are expected to be superseded by smart cards by October 2015. Embedded with computer chips, smart cards will be dipped, rather than swiped into machines. Banks are spending $8 billion issuing the new cards in an effort to protect customers and reduce the cost of fraud.

The new chip and PIN cards are authenticated by a specific PIN number that verifies the card’s user, which is allegedly more secure than a signature. Supposedly, the smart cards will make it more difficult for criminals to steal data from the chip, and practically impossible to copy and reuse card information that has been stolen. Banks hope that smart cards will drive down credit and debit fraud costs, which were estimated to be a whopping $16 billion in 2014.

Roughly 120 million Americans have been issued their smart cards so far, and that number is expected to grow to 600 million by the end of the year. All U.S. stores are required to purchase a new technology called EMV, which stands for Europay, MasterCard and Visa, in order to process payments using smart cards.

More money than it’s worth?

Banks typically pay for fraudulent purchases made on stolen credit cards. This will all change by October. If merchants don’t upgrade their card readers, card companies will hold businesses accountable for credit card fraud. In other words, credit card companies are forcing local businesses to purchase their technology.

Many local business owners, however, don’t believe the new technology is worth their time or money. Upgrading terminals to read smart cards can cost anywhere between $200 and $1,000 per device. American Express (AXP) is offering companies $100 towards the upgrade, which is a drop in the bucket for both small and big businesses.

A medium-sized shop, for instance, may spend up to $25,000 installing the new machines. These companies cannot spare an employee’s yearly salary on the new equipment. Major companies like Target, on the other hand, are spending as much as $100 million towards the upgrades.

Smart cards won’t stop online fraud

Furthermore, the smart card system won’t be much safer than the current card system. While smart cards will make it more difficult for criminals to make physical copies of your card, they can still use the stolen credit card number online. An estimated 16 percent of fraudulent credit and debit card purchases are made on the Internet.

Online fraud is expected to rise in the age of smart cards. Research from consulting firm Aite Group suggests that online card fraud is expected to double to $6.4 billion from $3.1 billion between 2015 and 2018.

Furthermore, cyber criminals can still break into a store’s computer system and steal credit card information. Smart cards will not prevent massive hacks at Target, Home Depot and Albertson’s, among other major businesses, from occurring.

Most banks claimed they won’t be ready for smart cards by October because there just wasn’t enough time to make the necessary computer upgrades. Despite the initial October target, only 23 percent of debit and credit cards are expected to be replaced in 2015. Some of the nation’s top banks claim that they will replace the cards upon expiration. This means that many cards won’t be upgraded until 2016 or 2017.

The fundamental problem with smart cards is that they are a short-term solution to a long-term problem. Cyber criminals will always contrive new and creative ways to combat this technology. Spending more money to save money doesn’t solve the underlying problem; it exacerbates it.


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