What Is a Chip-And-PIN Card?

A chip-and-PIN card is a type of credit card in which the cardholder must authorize the transaction by entering their personal identification number (PIN)

Unlike previous cards which utilized a magnetic stripe containing information about the cardholder, chip-and-PIN cards contain a square-shaped microchip that generates and stores unique information for each transaction. As such, chip-and-pin cards are less susceptible to fraud than previous generations of credit cards.

Key Takeaways

  • Chip-and-PIN cards are credit cards with improved security features.
  • A chip-and-signature card uses a data-enabled microchip and requires consumers to provide a signature to complete transactions.
  • Unlike the older model of magnetic stripe cards, chip-and-PIN cards do not require customers to sign their receipts.
  • Instead, chip-and-PIN cardholders simply enter a PIN to verify purchases, while a small microchip embedded in the card generates and records unique transaction information.

How Chip-And-PIN Cards Work

From a customer’s perspective, using a chip-and-PIN card is very similar to using the older magnetic stripe cards. When making a purchase, chip-and-PIN cardholders simply insert the card into the merchant’s point of sale (POS) terminal, so that the microchip can be read by the machine. The POS terminal then prompts them to enter their PIN, in order to authorize the transaction.

By contrast, magnetic stripe cardholders must swipe their cards through the POS terminal and then sign a printed receipt. While this older system was also relatively fast, it had some key disadvantages. For one thing, magnetic stripe cards require merchants to hold on to large amounts of paper records, which can easily become lost or faded over time. Moreover, employees often fail to verify that the signature provided by the customer matches the signature shown on the back of their card, making it easy for a dishonest cardholder to produce a fake signature when using someone else’s credit card.

Chip-and-PIN cards improve upon both these limitations. Despite being the same size and shape as magnetic stripe cards, they overcome the need for physical records because the POS system can detect electronically whether a correct PIN was provided by the customer. The use of a PIN also bypasses the need for employees to verify that the signature matches the one shown on the card, while the integrated microchip reduces the risk of counterfeiting by generating unique transaction codes each time the card is used.

Through these measures, chip-and-PIN cards reduce the risk of credit card theft. After all, would-be thieves cannot simply authorize transactions using false signatures. Instead, they would need to know the true user’s PIN, which is difficult considering that the true user can simply change their PIN once they discover that their credit card has been stolen. 

Real World Example of a Chip-And-PIN Card

Michael works at a small retail store, which recently upgraded its POS system. In the past, he could only accept payment by cash or magnetic stripe credit cards. This meant that Michael would need to obtain signatures from his customers, and hold on to those records in order to verify his transactions later on. Although this method worked reasonably well, it was time-consuming and prone to inaccuracies. After all, loose receipts have a tendency of being lost, and their printed data can easily fade over time.

In recent years, customers have begun using chip-and-PIN cards, and were surprised to learn that they still needed to sign their receipts. In response, Michael recommended to his employer that they upgrade their POS system to one capable of accepting these new cards. In doing so, he emphasized that the new chip-and-PIN system would reduce the time required to verify past transactions, eliminate the risk of lost or faded receipts, and help protect customers from credit card fraud.