As it was with Democracy, so it is with credit card technology. The Europeans, with their chip-and-pin fraud protection system, are once again leading the way to advancement, and while the technology has been in use since 2005, a recently-passed European Payments Council (EPC) resolution stands to significantly affect its role in the payment landscape on both sides of the pond.
The resolution, titled “Preventing Card Fraud in a mature EMV Environment,” restricts the use of magnetic stripe credit cards and gives European banks the right to refuse authorization for transactions involving credit cards using such outdated fraud protection technology.
While this resolution has no direct impact on or jurisdiction over credit card use in the United States, rules restricting magnetic stripe credit card use could prevent European travelers from making purchases using their credit cards while traveling in the U.S. Thus, the economic pressures resulting from the EPC resolution could very well initiate a domino effect that expedites a fraud protection upgrade in the U.S.
On the other hand, the resolution could also turn out to be somewhat ineffectual. European merchants want American tourists to be able to spend money as easily as possible. If the resolution prevents that and costs merchants money, there could be significant political pressure for the EPC to back off its harsh stance on the magnetic stripe credit card.
Magnetic stripe technology was considered groundbreaking when it was introduced in the 1960’s. Replacing a system where merchants manually cross-checked credit card numbers to a list of known fraudulent accounts, the magnetic stripe allowed a card to be quickly checked against a centralized database upon being swiped. However, in the five decades that have since passed, technological advances have rendered the magnetic stripe outdated.
Europe moved on to the more advanced chip-and-pin technology in 2005 because the high cost of telephone calls across Europe necessitated a decentralized means of fraud protection that did not rely on information being sent across phone lines to a central database somewhere on the continent. Chip-and-pin technology—which requires a consumer to enter a Personal Identification Number (PIN) that corresponds to a computer chip embedded on his or her card upon making a purchase—thus emerged.
While attempts at introducing smart card technology in the U.S. have been made over the years, they have all failed to catch on. As a result, the U.S. credit card landscape still centers on the magnetic stripe, a fact that is perhaps troubling given the EPC resolution.
It might become more difficult for Americans traveling in Europe to pay for goods using magnetic stripe credit cards because not only will the infrastructure be set up for chip-and-pin cards, but merchants might also be hesitant to accept a payment vehicle that is perceived as a fraud risk. As a result, it is key that American travelers show merchants their passports upon making a purchase with a U.S. credit card. Having access to cash when traveling abroad is important as well because many automated systems, such as kiosks in train stations, only accept chip-and-pin cards.
“The EPC resolution makes it that much more important for American consumers to be smart about how they approach overseas spending,” says Odysseas Papadimitriou, CEO of the credit card comparison website Card Hub.com. “Not only should they depart equipped with a no foreign transaction fee credit card, but they must also open a debit card that does not charge extra for ATM withdrawals overseas and make sure to carry their passport with them wherever they go while traveling.”