This chip pins down fraud

PW: Adrian, can you explain what Chip & PIN is?
ADRIAN: Very simply, this is a secure card system to help prevent fraud.

PW: So what is Chip?
ADRIAN: It’s a microchip embedded into a debit or credit card. It holds the same data as a magnetic stripe as well as providing additional security features as a safeguard against counterfeiting. Chip or ‘Smart’ cards have been around for a while now, but the migration from magnetic stripe cards to ‘smart’ cards is only now beginning to gathering momentum.

PW: And what is PIN?
ADRIAN: A PIN, or Personal Identity Number, is a four digit code that proves you are the rightful owner of the card when making a Chip & PIN based transaction. It’s the same identification principle currently used to access ATM’s with plastic cards.

PW: Why is Chip & PIN being introduced now?
ADRIAN: It’s part of the banking industry’s ‘fraud fighting’ programme. Plastic card fraud has been rising at around 30% per annum in recent years and now stands at over £400m per annum. The banks believe that Chip & PIN could more than half this figure.

The Chip is more secure than the magnetic stripe in preventing fraud from counterfeit cards as it eliminates ‘skimming’, the process by which magnetic stripe cards are copied. Skimming is responsible for around 80% of card fraud. Faking the new smart cards is likely to prove too complex and expensive for fraudsters.

The PIN combats the other 20% of fraud from misuse of lost or stolen cards. It’s more effective than a signature as proof of identity as you must know the PIN to use the card.

PW: Why has there been such an increase in card fraud?

ADRIAN: This partly reflects increased card usage, but it is largely a result of organised crime activities. Criminals often use sophisticated methods of card crime as a comparatively low-risk way of raising revenue to fund more violent offences.

PW: So what has all this to do with wholesalers?
ADRIAN: It’s really applicable to wholesalers who operate retail stores as the banking sector has set a deadline of the end of 2004 for retailers to ensure their checkouts are Chip & PIN compliant. One of the incentives banks are offering is improved Merchant Service Charge rates for retailers who implement the technology. But the real driver for change is more likely to be the change of rules which will make retailers who have not implemented Chip & PIN liable for any fraudulent card use in their store.

PW: What about Cash & Carries?
ADRIAN: Yes, the new standards will also apply to card transactions at Cash & Carries.

PW: What about Internet or telephone sales?
ADRIAN: The control of ‘Card Not Present Fraud’ arising from transactions such as these is not covered by the Chip & PIN programme, but is under investigation separately.

PW: So how do you make your checkouts Chip & PIN compliant?
ADRIAN: They need to be able to read the Chip on the new cards and provide a PIN entry device so customers can enter their PIN. If you use a stand-alone card terminal, rented from a bank, the bank will upgrade your equipment. However, if you have an integrated till system, with integral card reader, the responsibility is yours. You must upgrade your integrated system or choose a stand-alone terminal.

PW: How much will it all cost?
ADRIAN: This will depend on several factors, including the size of your operation, the type of solution you choose and which hardware you select. It won’t be cheap, but it will be better than having to bear the cost of fraudulent transactions. And you need to bear in mind that, as the bigger players invest in the new technology, smaller players who don’t will find fraud migrating to them as they become easy targets for fraudsters.

PW: But surely there’s plenty of time for companies to implement this new technology?
ADRIAN: The end of 2004 deadline might seem a long way off, but selecting, testing, gaining approvals, and rolling out a solution takes time. Companies who haven’t started looking at the alternatives yet need to do so now. Leaving it until summer 2004 will be too late. They’ll just be joining the bottleneck that is likely to develop as the deadline approaches and everyone starts to panic.