It looks like the chips may be down for credit card fraudsters as new “chip and pin” technology is rolled out here over the next five years. But while the biggest issuers of plastic, Visa Canada and MasterCard, say the microchip cards will reduce fraud, the Retail Council of Canada is worried about the costs its members may be forced to bear. “What the chip means is the requirement for retailers to make a substantial investment in new technology,” says Peter Woolford, the council's vice-president of policy development and research. He notes that some in the industry have estimated the cost of conversion for issuers, processors and retailers could be in the billions. “As with any investment, businesses want to be sure we understand the costs and benefits involved.”
As chip-and-pin cards eventually replace the magnetic-swipe cards (with signature verification) commonly used today, Canadian Visa and MasterCard holders will have to use a personal identification number, similar to what's already in place with debit cards. Allan Wright, director of chip initiatives at Visa Canada, says the new system has the potential to eliminate up to 50% of credit card fraud–especially “skimming,” whereby a dishonest merchant illegally copies information from magnetic-swipe cards.
Under an agreement announced in the spring between MasterCard Canada, Visa Canada and Interac Association, the chip-and-pin cards will arrive in earnest here in 2007, and the changeover should be complete by 2010. It's a huge undertaking, with 25 million Visa cards in Canada and 600,000 merchant locations that will have to convert to the new system.
At MasterCard Canada, which has about 31 million cardholders, president Kevin Stanton says the global move to chip and pin is inevitable, so getting the technology early means Canadian cardholders will be less vulnerable to fraud migration from other countries. Stanton adds the new readers will also be able to handle magnetic-strip cards.
According to Wright, fraud committed on credit cards issued in Canada likely exceeds $200 million annually, a number that chip-and-pin will reduce. The technology is now in wide use in Europe, the U.K., Asia, Latin America and the Middle East. In 2003, RBC Royal Bank launched Royal Avion VISA, the first national chip card in Canada.
Retailers accepting Visa won't be forced to adopt the new technology, but Wright says the benefits to merchants will be an inducement thanks to faster transaction times, fewer charge-backs and an improved audit trail. Wright points out that with large U.K. retailers, the payback period has typically been in the one-year range. To help minimize implementation costs, MasterCard's Stanton says retailers can update card readers as part of the “natural replacement cycle.”
But Woolford says some retailers are questioning the benefits of chip-and-pin. While it may help prevent in-person credit card fraud, it won't necessarily stop fraudulent purchases made through the telephone or Internet if the PIN can't be used. Indeed, in Britain such frauds have increased, says Woolford. He's also concerned retailers may be forced to swallow more fraud liability costs if they don't invest in chip-and-pin. “Obviously, we're interested in reducing credit card fraud. But you have to decide if the changes you're going to invest in make sense.”