Hack-Resistant Credit Cards Bring More Safety—at a Price

A secure "chip-and-pin" debit card being used in Bonn, Germany Photograph by Ute Gabrowsky/Photothek via Getty Images

After the data breach that compromised some 40 million credit cards—not to mention the personal information of 70 million customers—Target’s chief financial officer, John Mulligan, apologized again and again and promised that the retailer will improve security, in part by accelerating a shift to more secure payment cards.

What exactly does that mean? During testimony this month on Capitol Hill, Mulligan referred to “chip technology;” others who testified threw around the term “chip-and-pin” cards. They’re talking about credit cards and debit cards with an embedded microchip on which the card information—card holder, card number, expiration—is stored. In a chip-and-pin system, instead of swiping and signing to make payments, point-of-sale machines read the chips, and cardholders enter PIN codes to verify their identities.

The technology, which is already widely used in Europe, provides better protection of consumer information because the chip itself is encrypted and the cards are difficult to counterfeit. The chip technology has been credited with impressive declines in payment-card fraud in the U.K. and Canada. Visa and Mastercard have been pushing the transition (PDF) for years in the U.S. and have set an October 2015 deadline, after which they will no longer accept liability for fraudulent transactions based on the old magnetic strip technology.

Before the Target hack changed matters, though, issuing banks and merchants had a concrete reason for stalling: cost.

Making chip-enabled cards costs six to eight times as much as traditional magnetic-strip cards, according to Al Vrancart, an industry adviser and founder of the International Card Manufacturing Association. Moreover, personalizing a card—adding the holder’s name and other details—is roughly twice as expensive with chips than with strips, he says.

Combined, the new costs take the cost of manufacturing a payment card from about 50¢ to about $2.20—a 340 percent increase. With what Vrancart says is roughly 1 billion cards manufactured in the U.S. each year, the total in additional spending comes to about $1.7 billion. He estimates that only 7 percent of financial cards in use in the U.S. today have chips.

“Ultimately, the financial issuing institution will absorb that cost, but we always know that this kind of thing ends up trickling down to the consumer,” Vrancart says.

That doesn’t include the amounts merchants will have to pay to get new point-of-sale (POS) systems that can handle chip cards. Target says it’s putting $100 million into switching to chip-enabled technology in stores and on its proprietary cards. Vrancart estimates new POS terminals could cost from $300 to $600 a pop, depending on volumes ordered and product features.

He’s been getting calls from equity firms that want to understand the card manufacturing industry better and see it as an area for investment, he says.

Companies that stand to benefit from the flurry of change include three European ventures that Vrancart calls “the Big Three” of card makers: Gemalto; Oberthur Technologies, and Giesecke & Devrient. U.S.-based card makers include CPI Card Group and Perfect Plastic Printing. And companies that provide third-party personalization and fulfillment services include Total System Services and Fiserv.

Still, chip-and-pin technology is no panacea. You’ll still have to worry about payment fraud in online transactions.