How Chip Cards Work

Chip cards use a sophisticated approach to payments. Traditionally, a magnetic stripe on the back of a payment card transmits simple numeric information to the POS terminal when the card is swiped. The terminal then relays the information to a financial institution for authorisation, and the cardholder signs a receipt after approval.

Instead of being swiped to communicate its payment information, the chip card is inserted into a terminal and remains there throughout the transaction. The chip stores the issuer’s authorisation rules electronically; it can either approve a purchase offline or ask for online authorisation, depending on the circumstances. If applicable, the chip card can also check the cardholder’s PIN as an alternative means of authentication. The result of these features is added security, a more streamlined payment transaction, and better customer service.

Chip cards are also more difficult to counterfeit than magnetic stripe cards, making them a powerful fraud deterrent.

Because chip cards will not completely replace magnetic stripe cards overnight, both types of cards will have to be accepted for a while. Chip terminals are designed to accommodate both, so there is no need to maintain two separate terminals.

Chip technology also offers increased security for online merchants. In a growing number of markets around the world, shoppers can insert their chip card into a simple, handheld card reader and enter their PIN to generate a one-time-password that uniquely identifies them at the merchant’s website. Such solutions are helping to reduce fraud and make online shopping more profitable for merchants.