US tries to catch up on credit-card security

Associated Press

NEW YORK

The next time you swipe your credit card at the checkout, consider this: It’s a ritual the rest of the world deems outdated and unsafe.

The United States is the only developed country still hanging on to credit and debit cards with those black magnetic stripes, the kind you swipe through retail terminals. The rest of the industrialized world has switched — or is in the process of switching — to “smart” chip-based cards.

The problem with that black magnetic stripe on the back of your credit card is that it’s about as secure as writing your account information on a postcard: everything is in the clear and can be copied. Card fraud, and the measures taken to prevent it, costs U.S. merchants, banks and consumers billions each year.

The smart cards can’t be copied, which greatly reduces the potential for fraud. Smart cards with built-in chips are the equivalent of a safe: They can hide information so it can be unlocked only with the right key. Because the important information is hidden, the cards can’t be replicated.

But the stripes have been so entrenched in the vast U.S. payment system that banks, payment processors and retailers have failed to reach consensus on how to revamp it, leaving the U.S. behind the rest of the world.

“The card system in this country has been dysfunctional for a long time,” says Mallory Duncan, general counsel of the National Retail Federation.

“We have far, far too much fraud because we have a very antiquated payment system relative to the rest of the world. This is something they should have fixed a long time ago.”

Yet even here, there are now serious moves to swap conventional cards for smart cards in a few years.

Last month, Visa announced new policies that will give U.S. banks a reason to issue smart cards and stores several reasons to accept them, starting in 2015.

Eric Schindewolf, product manager for smart cards at Wells Fargo & Co., says Visa’s announcement is a “watershed” moment.

“I think that the U.S. has reached a tipping point. You’ll begin to see more and more smart cards in the hands of U.S. consumers,” Schindewolf says.

Smart cards are recognizable by the fingernail-sized gold contacts embedded on one side. Through the contacts, a chip inside the card can transmit information to a terminal when slid into a slot.