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How Chip and PIN Credit Cards Work


Chip and PIN Credit Cards and Security
A typical credit card reader at Target stores gives the customer the option of entering a PIN number or signing. With the massive credit card breach Target experienced, it has switched to Chip and PIN store cards.
A typical credit card reader at Target stores gives the customer the option of entering a PIN number or signing. With the massive credit card breach Target experienced, it has switched to Chip and PIN store cards.
Joe Raedle/Getty Images

The Target data breach during the 2013 holiday shopping season was the largest incident of credit card theft and fraud in the history of retail. The hackers — who were never caught — got their hands on the personal data of millions of Target customers [source: Floum]. It served as a wake-up call to corporate America about the costs of credit card fraud, both to their bottom line and their reputation.

American consumers account for a quarter of credit card purchases worldwide, but are the victims of 50 percent of the world's credit card fraud [source: Floum]. The rate in the U.S. has doubled since the early 2000s as chip and PIN cards spread across Europe [source: Schneider].

As the Target hackers demonstrated, data encoded in old-school magnetic-stripe technology is relatively easy to steal. Magnetic-stripe credit cards are also much easier to counterfeit than chip and PIN varieties. And magnetic-stripe cards offer almost no protection against the most basic kind of identity theft: stealing someone's wallet or purse. Since magnetic stripe cards require no PIN, a thief can simply scrawl a bogus signature — does your "digital" signature look anything like your real one? — and walk away.

The biggest reason chip and PIN cards are more secure than magnetic stripe cards is because they require a four-digit PIN for authorization. That's the easiest way to know that the cardholder is the real owner of the card. Also, since all data and communications are protected by cryptography, that makes chip and PIN cards infinitely more difficult to hack.

However, neither magnetic stripe nor chip and PIN cards offer much protection against fraudulent online purchases. In fact, in the U.K., while in-store credit card fraud has declined greatly, fraud from credit card use over the phone or Internet has exploded [source: Bell].

In Western Europe, more than 80 percent of all credit cards feature chip and PIN technology, and 99.9 percent of card readers are equipped to read them. In Canada and Latin America, the adoption rate of chip and PIN cards is about 54 percent [source: EVMCo]. The U.S. has resisted the switch, making American consumers and their credit cards the "low-hanging fruit" for hackers. But not any longer.


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