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How Credit Cards Work

By: Melanie Radzicki McManus  | 

Smart Cards

Smart cards first debuted in France in the 1960s, but didn't take off right away because the cards didn't work with every reader. It wasn't until the 1990s that they became ubiquitous in France and all of Europe, when the global EMV chip became standard for the cards. (EMV stands for Europay, Mastercard and Visa.) The U.S. took much longer to pivot to smart cards, first using them in 2014. As of 2015, all U.S. merchants were required to accept EMV cards

A smart card has a microprocessor, or computer chip, built into it — the EMV chip. This allows it to encrypt its own information and interact with more types of readers. You use a smart card by inserting the chip end into a reader or by contactless payment, which involves holding your card near a contactless-enabled terminal. While many people refer to this latter method as tap-to-pay, you don't have to tap your card against the reader. You simply need to hold it close to the terminal. When you do so, information from your card travels to the reader via short-distance radio frequency. Thus, this method is sometimes called radio-frequency identification technology, or RFID.

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While not all chip cards also offer contactless payment, most contactless cards also come with a readable chip. To figure out if your card offers contactless payment, look for its symbol on the back of the card: four curved lines that get bigger, like a WiFi sign tipped on its side.

Cryptography is essential to the functioning of these cards. The card and the card reader execute a sequence of encrypted sign/countersign-like exchanges to verify that each is dealing with a legitimate counterpart. And once this has been established, the transaction itself is carried out in encrypted form to prevent anyone, including the cardholder or the merchant whose card reader is involved, from "eavesdropping" on the exchange and later impersonating either party to defraud the system. Using the contactless system is faster than chip, swipe or cash payments — it often takes just a second or two.

Besides being secure, smart cards are capable of many kinds of transactions. For example, you can make purchases from your credit account, debit account or from a stored account value that's reloadable. The enhanced memory and processing capacity of the smart card is many times that of traditional magstripe cards, and can accommodate several different applications on a single card. It can also hold identification information, keep track of your participation in an affinity (loyalty) program and even provide access to your office. This means no more shuffling through cards in your wallet to find the right one — the smart card will be the only one you need!

Bluetooth cards such as Fuze are a new form of smart card beginning to emerge. This type involves the Bluetooth radio frequency, and lets you load up to 30 credit card numbers on it, along with their expiration dates and security codes. You can also load debit cards, gift cards, etc. Since Fuze connects to your phone remotely, you can erase the data on it if it's lost or stolen.

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