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How Chip and PIN Credit Cards Work

Chip and PIN in America

Why is the United States one of the last countries in the world to adopt chip and PIN credit cards? First of all, America has a strong telecommunications infrastructure, making it easy to instantly authorize purchases made with a magnetic-stripe card, so offline capability is not so attractive. Second, credit card fraud was historically concentrated in other countries, which made them more eager to embrace chip and PIN technology.

Finally, it will cost American retailers and banks around $8 billion to make the switch, between upgrading the credit cards themselves as well as the readers used in retail establishments [source: Schneider]. (It costs around $2 to produce and distribute a magnetic card and $15-$20 to produce and distribute a chip and PIN card [source: Bell].) And, the credit card market in the U.S. is so large and complex — more than 15,000 American banks issue cards — that it's more difficult to implement widespread changes than in countries with a more centralized banking and credit system [source: Ghahremani].

But, high-profile attacks like Target's and the rising concentration of credit card fraud in the U.S. have changed minds. America's largest two credit card companies, Visa and MasterCard, have a roadmap in place for switching over to chip and PIN credit cards by October 2015. Visa and MasterCard won't force banks and merchants to issue the new cards, but they will hold them liable for fraud that occurs with older, magnetic-stripe cards [source: Gara]. In preparation for the switch, large retailers like Wal-Mart and Target have already invested in checkout terminals that can process chip and PIN cards [source: Schneider].

For lots more information on how credit cards work, how to avoid identity theft, and tips for traveling abroad, check out the related HowStuffWorks articles on the next page.