What would a move from magnetic stripe credit cards mean for identity theft and fraud?

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The U.S. credit card industry is often viewed as somewhat of a dinosaur in the sense that the same magnetic stripe technology has served as the basis for its card security since the 1960s. Magnetic stripe credit cards were quite effective at reducing credit card fraud when they were first introduced, given that they automated the process of cross-checking a credit card number against a list of cards associated with fraud, which was previously done by hand at the merchant level. But as the sophistication of identity thieves has grown and countries around the world - including Canada, Japan and most European nations - have replaced so-called magstripe cards with chip-and-pin technology, the question is: When will the U.S. make a similar move?

Near-field Technology
It appears that change within the U.S. credit card market is on its way, given the building momentum for smartphone-based contactless payments. Certain Android phones will soon be equipped with Google Wallet, which uses Near-field Technology (NFC) and allows users to both store credit card information on their phones and pay for goods with a wave over a contactless payment terminal. Apple also reportedly plans to embed NFC chips in future iterations of the iPhone.

Proponents of these payment methods expect them to succeed where past manifestations of contactless payment technology like Visa payWave and MasterCard PayPass did not for the following reasons:

     • Large-corporation endorsements: Backing from companies like Google and Apple gives NFC a ready-made market and instant credibility • Seamless integration into daily life: Inclusion of contactless payment technology on smartphones, which people use ad nausea, makes it all the more likely that consumers will try applications like Google Wallet

     • You can leave your wallet at home: Previous forms of contactless payment required that you have your physical credit card; now you just need your phone

     • Multi-faceted applications: An electronic wallet serves not only as a form of payment, but also allows you to garner and redeem digital coupons as well as earn loyalty points to your favorite stores
     • Improved security: We'll get into the security benefits of NFC below

Contactless Payment Security
Given the security concerns that surrounded previous contactless payment attempts, what we all really want to know is: How effective will NFC be in preventing identity theft and credit card fraud?

Much of the past criticism of contactless payments revolved around the belief that the radio waves transmitted between card and card reader could be intercepted and the personal financial information contained therein stolen. You see, these cards used radio-frequency identification (RFID), which has a range of a few feet, and the information they contained did not have sophisticated encryption, if any at all. Despite the fact that RFID cards were still more secure than magnetic stripe credit cards, according to experts, fears caused by the possibility of radio-wave interception resulted in lackluster adoption by consumers.

While NFC is technically a sub-set of RFID, its range is substantially smaller - only four inches. What's more, not only are some NFC chips designed to self-destruct if interfered with, but a "secure element" chip was also designed to work with the NFC chip in a phone to encrypt and safeguard personal and financial information. This re-imagined contactless payment technology therefore makes confidential information substantially harder to intercept and should alleviate many of the concerns that plagued its predecessor. Google Wallet, for one, also requires a PIN, so your credit card account cannot be used by unauthorized parties even if you misplace it. Programs like Visa payWave and MasterCard PayPass, which emphasized the ability to make purchases quickly, were not PIN-based programs.

It therefore appears both that the magnetic stripe credit card faces some stiff competition and that this competition offers improved security features to consumers. While only about 0.05% of all purchases made with plastic is affected by credit card fraud and all major credit and debit card issuers guarantee customers $0 liability for unauthorized charges, it's understandable that people want to protect their money. Though you should still take measures to protect your financial information (e.g. shredding financial documents and using secure passwords), it appears as if the future of credit card technology is indeed bright in terms of fraud protection.

This informative article was written by our guest blogger: Odysseas Papadimitriou, a former Capital One executive and CEO of Card Hub, an online marketplace for credit card deals and discounted gift cards.
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