Sunday, June 29, 2008

Canada Going the Way of Chip and PIN

To combat fraud and encourage more consumers to shop online with more confidence, Visa, MasterCard and Canadian banks are upgrading more than 60 million credit and debit cards by adding a 13-millimetre square chip. While the magnetic stripe on the back of the card will remain, the real power of the card rests with the chip, a self-contained processor programmed with account information and an "encrypted key" which, with a PIN, secures the transaction.

It's considered to be virtually unhackable, state-of-the-art security. Instead of signing for a transaction, card holders enter a four to six digit PIN, which the card and your issuing bank confirm electronically. These so-called smart cards account for 70 per cent of cards issued in Europe where they have slashed fraud rates by up to 80 per cent.

No plan is in place for the 300 million plus American Visa and MasterCard holders to get the upgrade yet, says Oliver Manahan vice president advanced payments MasterCard Canada, and that could be an issue for the U.S. "We know fraud is like a balloon, you squeeze in one place and it bulges in another," says Mr. Manahan, noting putting more security features on cards physically not only drives frauds to other jurisdictions but also to other mediums — such as online — so a concerted approach is usually preferred.

Since Canadians are the highest per-capita users of credit cards and the second highest per capita users of debit cards, the rollout was an easy decision, says Mike Bradley Visa Canada head of regional products.

The chip is the latest to have an impact on how Canadians shop and manage their accounts — and a step closer to a cashless society. The most recent was the introduction a tap-and-go technology that allows contactless payments for items up to $25 on a debit basis — such as coffee, magazines and snacks. Currently deployed on credit cards, the radio frequency identification (RFID) tag, which triggers the transaction, is also being embedded in cellphones.

The introduction of the chip into debit and credit cards aims to loosen Canadians' attitudes to credit cards and drive us to use them more online and perhaps get duplicates for family members. MasterCard, for example, is testing the smart card's ability to determine who and how a card is used by offering a combination of prevention and alert features. "If you kids are at college, for example, you could set a limit so your daughter couldn't buy pizza for the dorm at 3 a.m.," said Mike Manchisi, MasterCard group executive for strategic account management. "You'd also get an SMS text message on your mobile alerting you if she went over the limit." The parent, as the account "administrator," could decline or approve the transaction and the idea is still in the prototype stage, say Manchisi.

Card makers and banks are also targeting online commerce.

A study by eMarketing for Yahoo! and MSN found that while 77 per cent of Canadian spent an average of $454 online over a six-month period in 2007, those who do not shop online cited concerns about credit card fraud as one of their top three reasons.

Even those who do shop online want better security," says Bradley.

Mr. Manahan says to further cut fraud around what the industry calls "card not present" transactions, British consumers are also being introduced to a $7 reader that plugs into a computer and can be "swiped" during an online transaction. "It then generates a one-time-only PIN or password, which validates the transaction," he says. "The advantage is, if it's a fraudulent site, they may have got the card number but they don't have another seable PIN."

While it'll be some time before the reader makes its way across the Atlantic, the chip card technology is currently undergoing trials in Kitchener-Waterloo. The first of the credit and debit cards will likely be issued some time later this year as customers' existing cards expire, says Mr. Manahan. The transition will likely take up to three years since retailers also have to upgrade their point-of-sale terminals — an issue within itself. Retailers generally welcome the cards because of their better security features, says Peter Woolford, vice-president policy development & research of the Retail Council of Canada, but there are concerns since there are more than 620,000 locations, many with multiple check out counters. "The new readers are about twice as expensive as the current ones," says Woolford. "For small retailers who lease the equipment it's no big deal but for the big retailers who buy it's a sizeable investment. Also the larger retailers have to change over all their system software." Some retailers are grumbling, he says, because if they don't have chip readers in place by Oct. 2010 they'll be financially responsible for any fraud. Conversely, ATMs and retailers have until 2012 and 2015 to be complaint for chip debit cards.

620,000: Locations in Canada where credit cards are accepted
600: Institutions issuing Visa and MasterCard products
1970: Year magnetic stripe was introduced on credit cards.
$1.4 trillion: Value of transactions globally on 817 million MasterCard issued credit cards in 2006.
61.1 million: Number of Visa and MasterCards in Canada 2006.
258,581: Number of cards used fraudulently in 2006 resulting in a write off of $185.5 million
$215 billion: Dollar value of transactions by Visa and MasterCard in Canada in 2006.

Sources: Canadian Bankers Association, MasterCard

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