Chip and PIN credit cards represent a significant technological upgrade to the traditional magnetic stripe credit cards. Instead of embedding credit card numbers and card holder information in a magnetic stripe, all data is contained within a tiny computer chip built into the card.
Chip and PIN technology has been around since 1984, when French banks began testing chip-based cards. In 1996, the world's leading credit card companies collaborated to create a new, more secure standard based on the French technology In the industry, chip and PIN cards are called EMV cards, an acronym standing for Europay, MasterCard and Visa, the three credit card companies that developed the first international technological specifications for chip and PIN cards [source: EMVCo].
The computer chip inside a chip and PIN card functions like a small computer. Not only can the chip store data, but it's also a data processor. One of the reasons why chip and PIN cards are so secure is that the chip uses cryptography to protect secure data when communicating with a card reader [source: EMVCo]. The chip itself has no power source, but it leaps into action when it comes in contact with a checkout terminal.
The most common way to use a chip and PIN card is to insert the end of the card into a slot on a card reader. Depending on the type of terminal, you will then either enter a four-digit PIN or sign a printed receipt. There are also so-called "contactless" checkout terminals where you simply hold the card near the reader to activate the chip. The same chip technology is being used in mobile phones to enable on-the-go mobile payments.
One of the benefits of chip and PIN technology is that the card reader does not have to be connected to a phone or Internet line to process the charge. With magnetic stripe cards, the card reader must "talk" with the credit card company before authorizing the charge. (In the old days, cashiers would call in the charge over the phone.) In places with slow telephony networks, chip and PIN terminals can work offline, processing the charge using the chip alone and then authorizing the charges in bulk at the end of the day [source: Gara].
Now, let's take a closer look at the credit card fraud problem and how chip and PIN cuts back on theft.