Chip Credit Cards and Payment Transactions: What Merchants Need To Know

Chip credit cards

There’s no shortage of ways customers can pay for goods and services today. Initially launched in 1996 by Europay, Mastercard, and Visa, EMV cards, or “chip cards,” provide users an additional way to secure their funds and card transactions. 

While other payment methods like digital wallets, mobile payments, and NFC transactions are all widely used, using a chip card for transactions comes with its own set of upsides. According to Visa, the introduction of chip cards helped reduce fraudulent card activity by as much as 87%. 

To learn the ins and outs of the features that come together to make a chip card work, here’s a walk-through of everything worth knowing about the payment technology. 

What is a chip card?

A chip card, often known as an EMV or smart card, is a debit or credit card designed with a microchip as well as a magnetic stripe. The card’s chip contains microprocessors equipped to communicate data safely. 

The chip provides an additional layer of security—especially for physical transactions in public spaces like stores and ATMs. The chip provides an encrypted way for payment processors to verify cardholder information.

How do chip credit cards work?

For a chip card to work, a payment acceptance device that’s certified with PIN and chip standards is required. Once the consumer inserts their chip card to make a payment, the chip and the card reader exchange information to authenticate the transaction and either approve or decline it. 

The technology behind chip cards is critical in enabling the end-to-end transaction process. The chip holds the cardholder data necessary for chip-approved devices to read. This works as a way to prevent counterfeit fraud, which has declined by as much as 76% since chip technology was widely implemented in 2011, according to Visa.


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Chip cards vs. magnetic stripe

An EMV chip card is safer than magnetic stripe cards. A card with a magnetic stripe only stores static information, which means your information stays the same with every transaction. Its static nature makes magnetic stripe cards easier to scam. 

How? Scammers can use skimming devices to steal personal information from magnetic stripe cards and make illegal copies of your card and access its funds. 

A chip card stores a digital code containing your information that changes with every transaction. This way, it’s harder for scammers to steal your data. The technology they would need to pull off copying your EMV chip card data is complex and costly. In other words, it’s not worth the effort. 

Cards issued won’t be required to contain a magnetic stripe starting in 2024.

According to Mastercard, no credit or debit cards will have a magnetic stripe starting in 2033. By then, most businesses will have ample time to replace their systems to be chip-card-friendly. 

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Chip and PIN vs. chip and signature

There are two kinds of chip cards. One requires a PIN and the other requires a signature. A chip and PIN card will require users to enter a PIN once prompted by the payment terminal to authorize the purchase That PIN is usually set once the cardholder activates their new card.

Debit cards are usually chip and PIN transactions and are generally accepted everywhere. On the other hand, chip and signature cards require swiping your card plus a signature. 

Once you’ve signed for your transaction, the purchase is authorized. Chip and signature cards may be less secure, as there isn’t a PIN that only you know as an added security layer and anyone can write in a signature. Chip and signature cards tend to be credit cards. 

How much do chip cards cost merchants? 

Merchants incur swipe fees for customers making purchases with either debit or credit cards.

You can expect in-person and online card transaction fees to range from 2% to 4%.

EMV non-compliance fees

There are select credit card companies that charge EMV non-compliance fees if merchants don’t have the appropriate terminals to accept chip transactions. It’s essentially a penalty for not using EMV-capable hardware. 

Each time a transaction is completed with hardware that isn’t EMV-compatible, merchants may incur a fee for that transaction. This industry mandate is a good thing to keep in mind as you set up your POS system and choose the appropriate hardware, as large financial organizations like Mastercard are looking to move away from magnetic stripe cards altogether. 

Benefits of chip credit cards

The ability to conduct contactless transactions along with better security are two of the biggest benefits of using chip credit cards. 

Contactless transactions

The onset of a worldwide pandemic in 2020 highlighted the efficiency and need for a contactless way to complete transactions. Chip cards fulfill that need. A chip card streamlines the payment process and can complete transactions in less time with contactless technology. 

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Better security

Security is always a concern with financial transactions, regardless of what form they’re accepted in. Chip cards come with an added layer of security that make purchases at a terminal less prone to fraud, while giving cardholders as well as merchants peace of mind. 

Chip card fraud

No safeguarding method is perfect. While chip cards have proven to be more secure, chip card fraud still happens. How is this possible? 

Unfortunately, scammers can still use a skimming device to copy your card information from the magnetic stripe—as chip cards still come with that stripe. Yet the caveat is that copied information from a chip card’s magnetic stripe can’t be used at any other terminal unless the chip is present or copied with it. 

Near-field communication transactions

Near-field communication, or NFC for short, is a wireless method of reading card information to complete a transaction. Chip cards that are enabled for NFC transactions can also be vulnerable to fraudulent card skimming devices if they’re close enough in range to read the data encrypted in the chip. Though this is less common, it’s still a vulnerability that comes with NFC-enabled transactions. 

Card-present transactions

Card-present transactions happen when a scammer pays by presenting a physical counterfeit or stolen credit card. While this type of card fraud still happens, it’s becoming less common due to a massive shift to online payment transactions. 

One way to lessen card-present transactions is by requiring cashiers to ask the consumer for a valid ID along with the card. To check for counterfeit cards, cashiers can also be instructed to check for the first few digits of a card’s number. Each card issuer always starts their card with a specific set of numbers. 

Card-not-present transactions

A recent report estimates retailers will lose an estimated $130 billion in fraudulent CNP transactions between 2018 and 2023. Card-not-present transactions make it possible to complete purchases over the phone, by internet, and even through the mail. Card-not-present transactions don’t require your physical presence to swipe or insert your card. 

This is how automated payments for services like subscriptions can get paid without your assistance. However, card-not-present transactions are also prone to fraudulent activity. 

Once a scammer gets their hands on your information, including your billing address and CVV PIN, they can make purchases without the merchant being able to verify if the information is their own. Leaders in the financial space predict fingerprinting card technology will soon be implemented to decrease fraudulent transactions. 

Until then, there’s plenty both merchants and consumers can do to minimize the risk of fraud. 

To safeguard card transactions merchants can:

  • Upgrade your terminals with better hardware or a better POS system
  • Incorporate an AVS (address verification service) for card-no-present transactions
  • Provide employees with adequate training on completing transactions
  • Require customers to provide their CVV number at checkout
  • Only use approved equipment

Consumers can further safeguard their card information by:

  • Only using ATMs that are closely monitored
  • If available, set up transaction alerts with your bank or credit card provider
  • When possible, opt to make mobile payments instead (its tokenization security features are even more robust)

Accepting chip cards

You’re a business owner and you want to enable the use of chip cards to ensure the safety of your customers. Enabling convenient chip transactions can be done in a few ways. 

Point of sale (POS) 

A point-of-sale system with built-in chip technology is a must-have for a business that wants to complete safe transactions with ease. Depending on what POS system you use, it comes with plenty of useful features. 

As an example, Shopify’s POS software can transform any of the following into a POS terminal:

Tablets: Once you’ve installed POS software on a tablet, merchants can safely process transactions, keep track of inventory, and search for customer profiles

Smartphones: Smartphones can be used in a retail setting. Its camera can be used as a bar code scanner and you can download POS software to conduct transactions.

Card readers: Card readers are also a payment portal that reads card information to complete transactions. Some of the newer versions can both take card payments and complete contactless transactions. 

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Hardware

EMV chip card readers are also an option. The more steps you can eliminate during a chip card transaction, the better. For that reason, it’s recommendable that merchants use hardware with customer-facing displays

However, because of innovation, it’s no longer necessary to use a clunky multi-device setup to accept transactions. To accept chip card payments safely, you can either install secure POS hardware or download POS software onto an existing device, including iPhones and tablets. 

Hardware prices vary wildly. So you’ll want to spend some time comparing and contrasting features to find your best option. Though long term, it’s helpful to stick with a payments system that offers an ecosystem of integrated payment options. 

For example, Shopify’s POS system can either be downloaded as software on an existing device or you can opt for one of its card readers or retail bundles, all of which function seamlessly with your Shopify ecosystem of retail tools.

Shopify card readers

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Easily accept chip cards at your store

Chip cards are here to stay, as it’s only a matter of years before magnetic stripe cards become completely obsolete. If you’re opening a retail store or thinking of upgrading your hardware, ensuring you upgrade to an EMV chip card qualified device is the way to go. 

The good news is that you have options. There are plenty of chip card readers on the market across a wide range of prices that can work for your business. Hopefully this guide gave you an idea of what payment setup options you have and how you can leverage them to process more secure payments.

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