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Visa takes a swipe at eliminating old-fashioned credit card technology

August 18, 2011

| Money Rates Columnist

Visa is trying to get U.S. merchants to invest in new credit card terminals that will allow consumers to pay for items with more secure, chip-embedded credit cards rather than the magnetic-stripe cards currently in use.

The computer-chip-embedded cards are dominant in Europe and other parts of the world but not used much in the U.S. Americans traveling overseas often can't use their magnetic-stripe credit cards if they're purchasing something at an unmanned vending terminal, such as those used in mass transit stations.

Resistance from businesses

Merchants in the U.S. don't really like spending the money on chip-reading checkout registers because the banks don't distribute chip-embedded cards. The banks don't want to invest in chip-embedded cards because they think they'll become obsolete when consumers start paying for transactions with their cell phones using what's called near field communication (NFC).

For Visa, it's like herding cats. The giant network that processes electronic payments may just have to get tough.

Actually, according to The Wall Street Journal, it already has. Visa is requiring financial institutions that process credit card transactions to adopt chip-based and mobile phone transactions within two years. And retailers will have to start assuming liability for credit card fraud by 2015--part of Visa's effort to make the safer chip technology more palatable.

So as not to appear too harsh, Visa will also waive a security validation requirement for merchants who generate 75 percent of their Visa transactions through a chip-enabled terminal.

Benefits for consumers

What all this means for consumers is that they may soon be able to sail through a checkout line by tapping or waving a card or a smartphone and punching in a personal identification number to make their purchases. This authentication process reduces the risk that you'll have your best credit cards' data stolen.

What's more, the new terminals Visa wants merchants to purchase can handle all three types of transactions--magnetic stripes, chip-embedded cards and NFC.

Fighting credit card fraud

Visa's push for chip-embedded cards and NFC comes at a time when thieves are able to create counterfeit cards by duplicating the account information stored on magnetic stripes. Chip cards, in addition to the PIN validation process, also create a unique transaction number that foils efforts to duplicate account information, the Journal said.

A report by the Aite Group found that new technology would cut the $8.6 billion card fraud losses that banks and retailers face each year by 30 percent.

That's a lot of money, but is it enough to pay for the installation of all those new terminals? According to the Mercator Advisory Group, card issuers will need to invest $2.8 billion and merchants will need to spend $2.6 billion to install the necessary equipment.

Some people are already paying for stuff with smartphones. In May Google unveiled Google Wallet, which allows users to pay at such retailers as Macy's, Subway, Toys R Us and Walgreens using mobile technology backed by MasterCard, Citi, Verifone and Sprint. And some banks have teamed up to let individuals make phone-to-phone cash transfers. Starbucks has payment apps for Android devices as well as Blackberrys and iPhones.

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