Chip-and-Signature Card

What Is a Chip-and-Signature Card?

A chip-and-signature card is a type of credit card that encodes its information in a magnetic stripe as well as a square microchip. The inclusion of the microchip enhances the security of the credit card by allowing individual transaction information to be recorded with each purchase. When using the card, customers must enter their card’s microchip into the card reader and also provide their signature on the resulting receipt.

Key Takeaways

  • Chip-and-signature credit cards are equipped with microchips and allow their customers to authorize transactions in a more secure fashion.
  • They gradually replaced the more antiquated technology of magnetic stripe credit cards.
  • Modern credit cards also allow customers to pay by simply tapping their credit card against the merchant’s point of sale (POS) terminal.
  • The liability of fraud falls onto the party that is least compliant with the chip-and-signature card technology.

How a Chip-and-Signature Card Works

Chip-and-signature cards are a more advanced version of the simple magnetic stripe cards that preceded them. When paying using a magnetic stripe card, the customer must sign their check in order to verify the transaction. However, this method of payment is relatively vulnerable to credit card fraud, since there is nothing preventing a would-be credit card thief from simply using a made-up signature.

To help mitigate against this risk, chip-and-signature cards include a small microchip that is physically embedded into the card. Whereas the magnetic stripe encodes static information about the card and its owner, the microchip generates unique data for each transaction that is made using the card. For this reason, it is far easier to trace purchases made using chip-and-signature cards, since those cards generate a detailed history of their transactions.

Development of Chip-and-Signature Cards

The development of chip-and-signature cards was made possible in part by the Europay, Mastercard, and Visa (EMV) technology standards. As its name suggests, these standards were jointly developed by major credit card companies such as Europay, Mastercard (MA), and Visa (V).

Through these standards, manufacturers and service providers were able to ensure that the rollout of chip-and-signature cards occurred rapidly and with limited disruptions. For instance, it is partly through these standards that merchants’ point of sale (POS) terminals are able to accept payments from multiple types of credit cards.

Going forward, it is likely that credit cards will continue to change as new technologies become available. One such example is near-field communication (NFC), a technology that allows payments to be made by simply tapping the credit card on a POS terminal. In these “contactless” transactions, the customer is not required to enter a PIN or a signature. Instead, the transaction is authorized and completed nearly instantaneously, substantially reducing the time required to make a sale.

Liability and Chip-and-Signature Cards

In 2015, it was determined that the liability of fraud would fall on the party that was the least EMV compliant. If a merchant does not adopt chip-and-signature card technology, relying only on traditional magnetic stripe technology, it would be responsible for any fraud. This could be severely damaging to small companies that might not be able to absorb large costs associated with fraud.

If a business is EMV compliant, then the liability of fraud falls on the credit card company or the issuing bank. This is important to note because the rollout of chip-and-signature cards at first was a rocky road. Consumers initially had to insert their card into a reader and then sign the receipt, making the payment process longer and different than what they were used to with traditional magnetic stripe cards. That requirement is no longer necessary as of April 15, 2018.

Many businesses avoided and still avoid adopting the technology in order to provide a simpler service to their customers. Adopting chip-and-signature card technology, though, is becoming less of an issue with the increased use of contactless payments. While it is not currently mandatory for merchants, the potential liability for fraud acts as an incentive to adopt the technology.

Article Sources
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  1. CreditCards. "Credit Card Glossary: Terms and Definitions."

  2. Visa. "Tap to Pay with Visa Contactless Payments."

  3. Stax. "Your Complete Guide to Chip and Signature Payments."

  4. Square. "Square Point of Sale."

  5. Chase. "What is an EMV Chip and How Does It Store Your Data?"

  6. Android, Google for Developers. "Near Field Communication Overview."

  7. U.S. Government Publishing Office. "The EMV Deadline and What It Means for Small Businesses." Accessed July 11, 2021.

  8. Board of Governors of the Federal Reserve System. "Changes in U.S. Payments Fraud From 2021 to 2016: Evidence From the Federal Reserve Payments Study," Page 31.

  9. American Express. "Frequently Asked Questions: Optional Signature Policy."

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