Patricia Lovett-Reid

With the week of Nov. 7-13 being International Fraud Awareness week, I thought it would be a great idea to look at a topic that has been appearing in wallets across Canada lately. A lot of people have been asking me about those "smart chips" on new credit and debit cards. They lean in close, and with an eyebrow raised they whisper, "Is this really good for me, or does it only protect the bank?" I guess people are wary of change and that's why there's so much confusion around the chips. I'm glad people are asking the question though, even if they fear some sort of a conspiracy. The short answer is that the chips are good for all; both the consumers and the banks.

According to the RCMP there were about 64 million credit cards in circulation across Canada in 2007. MasterCard and Visa rang up sales exceeding $240 billion. A number like that attracts criminals. In Canada, credit card fraud is a $407 million a year business and almost half of it stems from counterfeit cards. Fraudsters are now using modern devices (like embossers, encoders and decoders often supported by sophisticated computers) to read, modify and implant magnetic stripe information on counterfeit cards.

Lost or stolen cards represent 12 per cent of fraud. Fraud committed without the actual use of a card accounts for 31 per cent of losses. Deceptive telemarketers and fraudulent websites obtain card details from their victims by promoting the sale of exaggerated or non-existent goods and services. Fraud where cards are intercepted prior to delivery to the cardholder account for three per cent of losses.

Believe it or not, there is no typical fraud victim in Canada. They come from all backgrounds, all ages, all educational levels and from every corner of the country.

Criminals use three common methods to obtain your card information and Personal Identification Number or PIN. The first method is called "skimming". You hand your card over to a merchant when making a purchase and he swipes it through a hidden device to obtain the information embedded in the magnetic stripe so that a duplicate can be made. At the same time, a camera records you entering your PIN. The second method is when a debit handset is swapped with one that records the data entered. The data is then transmitted to a nearby fraudster. And in the last method, ABMs may be tampered with to either record or transmit your card details and PIN.

This brings us right back to the smart chip. It is virtually impossible to duplicate. It works with your PIN rather than your signature when processing a transaction. Unlike cards that rely on magnetic stripes, chip cards are immune to skimming at non-chip enabled devices. Also, the information is encrypted so it cannot be copied. Another benefit is what's called single key inscription which ensures that only the original credit card can be used. Information lifted from a magnetic stripe can be copied thousands of times, creating thousands of phony cards. That's not the case with chip & PIN cards.

To date, more than 483 million chip & PIN Visa cards have been issued in 113 countries. And they are chipping away at fraud. According to APACS, the U.K. payments association, losses at UK retailers are down by 35 per cent since 2005. In fact, fraud related to lost or stolen cards have been sliced in half since the adoption of chip cards in the U.K. in 2004.

It is also important to note that there is no change in liability for cardholders. You still remain fully protected from card fraud provided you haven't been negligent with the protection of your PIN.

Back to the original question: Are smart chips good for the consumer or the banks? It's clear that the reduced losses from fraud benefit the banks and credit card companies. Consumers are protected from unauthorized transactions on their credit and debit cards, but the biggest benefit is one of convenience. If you've ever had your card lost, stolen or compromised, you know that it can take anywhere from one to five days to get a new one. You also have to notify all the companies that have pre-authorized charges going to these cards. And, there is also the potential that fraudsters can damage your credit history. The increased security offered by chip cards reduces the likelihood that you'll be subjected to any of this.