Do Chip Cards Help to Reduce Fraud?

Do Chip Cards Help to Reduce Fraud?

June 12, 2020         Written By Heaven Speirs

The U.S. made the switch to chip cards back in 2015 as a means of reducing fraud and boosting payment security throughout the country. The question now is, did that make a difference? Do chip cards help reduce fraud? Has America seen a drop in card fraud since the switch to EMV technology? Let’s take a closer look at the prevalence of card fraud and the impact chip cards have had over the years.

Chip Cards vs. Magnetic Stripe Cards

Magnetic stripes were first added to payment cards in the 1960s. They provided an effective way to transfer the card’s information into a card reader, thus allowing payment to process. However, hackers soon discovered ways to clone or collect information from the magnetic stripes. Card providers needed a more secure way to relay card information without the data being compromised.

Enter chip cards, also known as EMV cards. EMV stands for Europay, Mastercard and Visa. It is the term used to denote cards with security chips embedded into them. The chips are like small computers attached to credit cards, debit cards, and prepaid cards. When the chip interacts with a card reader, it communicates highly encrypted data that is much more secure than magnetic stripes. It is nearly impossible for a hacker to collect data from a chip card, but that does not mean they are exempt from fraud risk.

Learn more: What’s the Difference between Magnetic Strip and Chip Cards?  

Types of Payment Card Fraud

Before we explore the impact of chip cards on fraud, we need to discuss the different types of payment fraud. Some of these circumstances were directly impacted by the transition to EMV cards, while others remained prevalent after the switch.

  • Card Skimming: A thin device known as a skimmer is attached to the card reader, collecting information from the magnetic stripe. Skimmers are most commonly found on ATMs and gas station pumps, but they can also be installed on merchant terminals. The data is used to create counterfeit cards or to make purchases online through card-not-present fraud.
  • Counterfeit Fraud: Card data is duplicated on a physical card to make fraudulent purchases or pull money from an ATM. Cash withdrawals are only available if the card data came with a corresponding PIN.
  • Card-Not-Present Fraud (CNP Fraud): As the name implies, card-not-present fraud occurs when a physical card is not available. This mostly covers online and phone-based purchases made with stolen card details. The card data may be collected from the physical card, or it may be taken from poorly-protected purchase information online.
  • Lost or Stolen Cards: If your card is lost or stolen, someone may use the card for unauthorized purchases. Many banks and credit card companies provide the option to ‘freeze your card’ via their mobile app. This allows you to pause the purchase abilities on the card until you find it, or order a new one without fear of fraudulent transactions.
  • Identity Theft: Someone uses your Social Security Number, contact information, and other identifiers to apply for credit cards or loans. If approved, the thief could rack up thousands of dollars in debt in your name. You can dispute these charges and have them removed from your credit, but it could take months for your credit score to bounce back. Monitor your credit reports for suspicious activity, and take action at the first sign of trouble.
  • Intercepted Cards: In this rare form of card fraud, a physical card is intercepted in the mail and activated without the owner’s consent. It is sometimes referred to as card-never-arrived fraud because the cardholder does not receive the physical card. Card-never-arrived fraud is difficult to achieve because most cards require multi-step identity verification to activate. However, if you notice charges on your account before your card arrives, immediately contact the card provider to dispute the transactions and order a new card.

How EMV Cards Have Impacted Payment Fraud in America

Shortly before the U.S. transitioned to chip cards, payment fraud was on the rise. In fact, 67% of card fraud in the UK came from the United States. Fraudsters made a last-ditch effort to gather card data or use stolen data before card security increased in America.

The official transition to chip cards occurred in October 2015. This is when the liability for fraudulent transactions switched to merchants, not card issuers. Merchants who did not have EMV card terminals by that point became responsible for fraudulent transactions from stolen card data. Example: Bill uses his credit card at Store X. The card reader at Store X is not chip-enabled, and it has a skimmer on it. Bill’s card info is stolen. Store X must pay for unauthorized purchases made with Bill’s card after the incident.

Nearly one year after the liability shift, Mastercard reported a 54% drop in counterfeit card fraud costs among U.S. retailers. Additionally, retailers who had not switched to EMV technology saw a 77% increase in counterfeit fraud costs. At that time, roughly 33% of U.S. merchants were chip-active.

Between December 2015 and December 2017, counterfeit fraud dropped by 76%. By May 2018, 63% of merchants were chip-active. Chip cards became a dominant force in America, accounting for 97% of card transactions. That number has since jumped to nearly 100%.

Not all cards have smartchips, but those without chips are now few-and-far-between. It took years for merchants and card issuers to officially transition to EMV technology. The delays were mostly due to the cost of transitioning – new card readers, software updates, new cards, new security measures, etc. Those costs have since been replenished in reduced fraud expenses, but there are some forms of fraud that were not reduced after the transition.

Did Chip Cards Cause an Increase in Card-Not-Present Fraud?

The adoption of chip cards forced fraudsters to change their strategies. Counterfeit fraud dropped dramatically because it’s nearly impossible to duplicate chip card data. As we mentioned above though, counterfeit fraud isn’t the only way criminals use card information.

A study released in 2018 showed a substantial increase in card-not-present fraud following the shift to EMV cards. In the cosmetic and apparel industries, CNP fraud rose 300%. At first glance, there appears to be a direct correlation between CNP fraud and chip cards, but there’s another factor to keep in mind: the rise of online shopping.

In 2017, there were $288 billion in eCommerce purchases in the United States. By the end of 2024, that number is projected to reach nearly half a trillion dollars. It is no secret that shoppers continually prefer shopping online over shopping in stores. That alone could have caused the spike in CNP fraud. The use of chip cards could be a contributing factor, but it is not the sole source of the issue.

How to Protect Yourself against Card Fraud

Overall, chip cards have helped reduce card fraud in America. Nevertheless, it is still important to take precautions to protect your credit. Here are some tips for preventing or addressing card fraud:

  • Only use your credit or debit card on trusted websites. Avoid shopping through unknown online retailers, and don’t follow email links. They may point to a phishing website that will collect your login or payment information.
  • Be careful when letting someone borrow your card. If you are going to let your teenage daughter use your credit card, can she be trusted not to lose it? Can a friend of yours truly be trusted not to steal your card information? Do not be afraid to say no. You have every right to protect your credit, your money and your identity.
  • Monitor your bank and credit card accounts for fraudulent purchases. We always recommend keeping an eye on your accounts, regardless of the circumstances. Set up text or email alerts for purchases. That way, you will be immediately notified about an unauthorized transaction.
  • Use a mobile wallet or PayPal as a middle-man for card data. This prevents online retailers and payment terminals from collecting data directly from your card.
  • Report fraudulent charges immediately. Your card provider can issue a refund and send you a replacement card right away. The sooner you act, the less damage you’ll incur – thus reducing your recovery time.
  • Monitor your credit reports for unauthorized applications and accounts. If you see credit inquiries or open accounts on your credit reports that you did not authorize, take action. Talk to the lender or credit card company to report identity theft, and then contact the bureaus to have the information removed from your credit.
  • Freeze your card if it is lost or stolen. You may be able to do this through the card provider’s mobile app or by contacting the customer service line. Freezing your account gives you a chance to find the card if you believe it’s misplaced. If the card is stolen, the thief will not be able to make a purchase because the account is paused. If you find your card, you can lift the freeze and resume use.
  • Take action if you are notified about a data breach. Change your online passwords, order a new card, and watch your accounts closely. Learn more: How to Protect Your Personal Information after a Data Breach

The information contained within this article was accurate as of June 12, 2020. For up-to-date information on any of the terms, cards or offers mentioned above, visit the issuer's website. Many of the offers on this article are from our affiliate partners, and LowCards.com may be compensated if you take action with any of our affiliate partners.

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About Heaven Speirs

Heaven Speirs is a contributing writer for LowCards.com. She remains up-to-date with the latest developments in the credit card industry and the financial sector as a whole. Heaven has over 10 years of experience in online journalism, the bulk of which has been focused on personal finance. Heaven attended Oklahoma State University, where she discovered her talent for research and content creation. In her spare time, Heaven enjoys painting, playing poker, and spending time with her husband and three dogs.