The magnetic stripe has long been the underlying technology of credit cards. Using magnetism to record information was first done during World War II, and IBM developed the first reliable magnetic stripe storage system embedded in plastic cards in 1960. Amazingly, more than 50 years later, we're still using the same technology to process billions of dollars in transactions a day.
But that’s about to change.
Cards in Transition
The major U.S. issuers and processors of credit, debit and charge cards have voluntarily agreed to begin phasing out magnetic stripe cards in exchange for a more secure technology called EMV, which refers to the hardware and software protocols that make up the technology. EMV cards come embedded with an integrated circuit—a computer chip—that can be read securely by point-of-sale terminals equipped with the necessary hardware and software.
Small-business owners who accept credit, debit and charge cards need to start getting their businesses ready—new point-of-sale technology will be required to process the updated cards. Unlike magnetic stripe cards that customers or cashier slide through a card reader, EMV cards are “dipped” into the reader and can't be removed until the transaction is complete.
Because the industry has voluntarily decided to make the transition to this more secure technology, there is currently no law in place that requires merchants to invest in new POS systems or accept EMV cards. To address this problem, card issuers have announced the following policies:
1. Dual-use cards will be created. For the time being, credit card companies will create cards that will come with both an EMV chip and a magnetic strip. Processors will be able to continue to accept cards that consumers swipe at magnetic terminals. That way, cardholders can continue to conduct business at stores that haven’t upgraded to EMV.
2. A liability shift begins in October 2015. Under current policies, card issuers are the ones that absorb the costs related to fraud; neither the business nor the consumer bears any responsibility for a fraudulent transaction. But that will change as of October 1, 2015, when card issuers will begin holding the least secure link in the transaction chain responsible for the cost of fraud. For instance, if a card processing company doesn’t offer its clients EMV technology, then they'll have to pay. If a business refuses to transition to EMV technology even though it’s offered to them, then they'll be the ones to pay. Consumers will still not be held responsible for fraudulent transactions. Given the costs involved, gas stations have been given until 2017 to upgrade their pumps. The complete timeline is available here.
Despite these policies and the risks involved, it’s expected to take some time before all cards are EMV compliant. But the liability shift is the biggest risk to small-business owners, who could be on the hook for thousands of dollars of merchandise purchased fraudulently.
So what's a smart, well-prepared business owner to do? Start setting aside funds now to upgrade your technology over the next year. You don't want your POS system to become your weakest link.
Read more articles on technology.
Photo: Getty Images