The eruption of Iceland's Eyjafjallajökull volcano introduced Jim Burke to the difficulties millions of Americans face when they try to use their credit cards abroad.
Burke stood in line for more than seven hours at an Amsterdam train station in April as he sought passage to Belgium. He watched European travelers, also grounded by the eruption, buy tickets at automated kiosks that accepted microchip-embedded credit cards. Burke's Bank of America (BAC)-issued Visa (V) card, with the standard magnetic stripe on the back, was useless. When the 64-year-old retired economist from Bandon, Ore., returned home, he called Bank of America to ask whether he could get a chip card. The answer disappointed him: "They have basically said, 'Sorry, but you're out of luck.' "
Almost 10 million U.S. cardholders experienced credit-card acceptance problems abroad in 2008, costing banks $447 million in lost revenue, according to a study released last year by Boston-based research firm Aite Group. The problem: The U.S. is one of the few developed countries that has not adopted the EMV standard. The standard is managed and maintained by EMVCo, which was formed in 1999 by Europay, MasterCard (MA), and Visa. One of the most recent converts to the technology is Canada, where merchants face a March deadline to have the requisite hardware in place. As of September, there were 1.1 billion EMV cards in circulation worldwide, according to Otley (England)-based EMVCo.
EMV-chip cards are less prone to fraud. The magnetic stripe on regular cards holds unencrypted data that remain static from one transaction to the next. An EMV card exchanges data with the card reader, producing a digital signature unique to each transaction. "There is no way that you can actually clone the EMV card," says Jack Jania, general manager for secure transactions at the North American offices of Gemalto, the French company that is the world's largest smart-card maker. "Every one has its own unique key. Without it you can't run the cryptographic algorithms that align with your particular account."
Credit-card issuers and merchants in the U.S. haven't embraced EMV in part because the cards are more expensive than their magnetic-stripe counterparts and the cost may exceed any savings from a reduction in fraud, says David Robertson, publisher of The Nilson Report, an industry newsletter. U.S. banks that issue Visa and MasterCard credit cards wrote off about $900 million in fraudulent charges last year, representing less than one-tenth of 1 percent of total card spending. The issuers are also reluctant because EMV may soon be leapfrogged by other technologies.
The first financial institution to switch to EMV in the U.S. was the U.N. Federal Credit Union, which sent 5,000 cards to its most affluent members on Oct. 18. "It's going to improve acceptance outside the U.S. and also combat fraud," says Card Services Manager Merrill Halpern. The credit union has about 90,000 members, many of them diplomats who travel frequently. Says Halpern: "We're hoping that what we started is the beginning of a trend."
The bottom line: U.S. issuers have shunned chip-embedded cards because they believe the costs outweigh the benefits.