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U.S. credit cards becoming outdated, less usable abroad

'Smart' chip-and-PIN cards catching on worldwide, but not here

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At an increasing pace, countries across the globe are implementing "chip-and-PIN" credit card technology, which could create more hassles for travelers from the United States, which has no to plans to convert -- at least for now.

U.S. cards becoming outdated as countries move to chip and PINThe so-called smart cards -- usually referred to as chip-and-PIN cards because credit cards have computer chips on them and cardholders, instead of signing for purchases, must punch four-digit PIN numbers into terminals -- have become standard in the U.K. because of their superior fraud-prevevntion abilities. Other European countries followed, and now countries in Asia, North America and South America are doing the same. Recently, major Canadian issuers announced plans to be fully converted by 2010.

It isn't a huge problem for Americans abroad yet because most terminals used by merchants in countries that use smart cards also have the capability to accept the swipe of a magnetic stripe card, and the major credit cards brands require merchants to accept nonPIN credit cards. When a magnetic stripe card is swiped, the chip-and-PIN terminal should give prompts that tell the clerk how to complete the transaction.

Travelers have found it doesn't always happen that way. For example, at certain hours at transit stations, there is no clerk -- just a machine. And sometimes, the clerks who are available are poorly trained, says Mark Bowerman, a spokesman for APACS, the U.K. trade association for payments.

"We expect to be able to use our cards in your country," Bowerman says. "And you should be able to use your cards in our country, and the overwhelming majority of time that is happening." 

Smart cards have pluses
There are two main types of technology in use for credit cards today -- the decades-old technology still used in the United States, in which information is encoded into a magnetic stripe on the back of the card, and the newer so-called smart cards, which contain a computer chip that holds information. (See Anatomy of a credit card.) The chip-and-PIN smart cards used in Europe, first introduced to help reduce fraud, have several advantages.

"You get authorization almost immediately, and the card never leaves your presence," says Don Rhodes, director of risk management policy at the American Banking Association, who recently took a trip to the U.K., where he had lunch with friends who live in London. One of his friends picked up the tab, using a chip-and-PIN card. "The server brought a hand-held device over to the table -- in my experience, they look kind of like the old cell phones -- and my friend inserted the card into the slot, punched the PIN number into the keypad and it quickly printed out the receipt."

Top countries visited by Americans in 2007
Country Chip and PIN? When?
Mexico No, but is in the process of switching to cards that use chips but do not require PIN numbers Plan to finish converting by end of 2008
Canada In the process of switching Plan to finish converting by 2010
UK Yes Finished converting in 2006
Italy In process of switching EU standards require they finish converting by 2011
France Yes Finished converting in 2007
Germany In process of switching EU standards require they finish converting by 2011
Japan No, but some cards in use have chips, but do not require PIN numbers n/a
Jamaica No, and there is no national plan to convert n/a
People's Republic of China No, and they have no national plan to convert. However, some cards in use have chips, but do not require PIN numbers. n/a
Spain In process of switching EU standards require they finish converting by 2011

Smart card transactions can be quicker, because the terminal and card communicate with each other -- the terminal verifying that the card is authentic and vice versa -- instead of the terminal having to communicate via Internet or wireless with the card issuer to verify that the card is real and hasn't been reported lost or stolen, says Randy Vanderhoof, executive director of the Smart Card Alliance, a nonprofit organization that works to promote the adoption of smart card technology.

The chip-and-PIN cards add a level of security, some experts say. "You can't forge a PIN," says John Morgan, director of credit card products and electronic banking for AAA Financial Services.

Also, when a card leaves the cardholder's physical presence, it can be compromised, using a hand-held information-stealing device called a skimmer, Rhodes says. "A server could take a card from a table in a restaurant, skim it in the device, download the information onto a computer and use it for card-not-present transactions or to counterfeit another card," Rhodes says. So-called card cloning also can be easier with magnetic stripe cards. Vanderhoof says: "With chip-and-PIN, it's nearly impossible to create a fake card."              

But, of course, smart card technology isn't perfect, Rhodes says: "I've seen some stories that fraudsters have been able to hack the technology for chip-and-PIN, and frankly nothing is 100 percent secure."

U.S. cardholders run into travel snafus
Most traveling U.S. residents who stick to large hotels accustomed to serving tourists, or major restaurants or department stores, probably won't have problems using their magnetic stripe cards. But in small shops, hole-in-the-wall restaurants and unattended gas stations, some U.S. residents hit snags when it's time to pay.

For Chicago businessman Mike Maddaloni, who owns an Internet consulting company, a recent business trip to Finland to attend a conference brought back memories of credit card hassles he and his wife experienced on a vacation in Europe in fall 2006. On a break from his recent conference, he went with a business associate into a department store in downtown Helsinki. "We asked if the store required PINs and the clerk said no, but that the store would be updating technology and they soon will require PINs."

On Maddaloni's previous trip to Denmark, he had no problem paying with his credit card at businesses accustomed to dealing with international travelers. "Places like hotels and Legoland Park took my credit card -- no problem," Maddaloni says. But it was a different story when he went to a store to buy a $75 temporary mobile phone. "I went to pay with my Amex card, and the clerk said I needed a PIN. The clerk didn't understand why I didn't have a PIN and called American Express, and they said if I didn't have a PIN, I couldn't use the card. I finally had to go to an ATM to withdraw the money.'"

I went to pay with my AmEx card, and the clerk said I needed a PIN. The clerk didn't understand why I didn't have a PIN ...

-- Mike Maddaloni    

Then, Maddaloni had more problems when he and his wife offered to treat a friend who lived in Denmark, and her two daughters, to lunch at a sushi restaurant in Copenhagen. "I pulled out my credit card, and no one knew what to do about my not having a PIN. The waitress went to the counter to ask someone about it and came back because she had remembered there was a way around it," Maddaloni says. "We had to explain to our friend that it wasn't because we didn't have credit."

Later, Maddaloni ended up going across the border into Germany to buy gas to avoid any more PIN-related debacles. "Any time you go to pay for something with a credit card and it gets declined for whatever reason, you have a bit of embarrassment," Maddaloni says.

Thanks to an education campaign by Visa and the American Automobile Association, however, it's become less common for travelers to have their PINless cards declined by merchants, the AAA's Morgan says. In February 2006, when the transition to chip-and-PIN was completed in the U.K., merchants became responsible for shouldering the cost of fraud if they did not make a chip-and-PIN cardholder enter a PIN number. "Merchants were misinterpreting what they should do with nonchip-and-PIN cards," Morgan says. "The rule was that if it was a chip-and-PIN card, you had to get a PIN or you were on the hook. So, merchants were saying, 'I can't take your card -- put it back in your wallet,' and Americans were saying, 'I can't even buy lunch because they're not taking my card.'"

Credit where credit is due

If you're a U.S. resident with a magnetic stripe card planning to take a trip to a country that uses smart cards, here are some tips from travel and credit experts:

  • Call your credit card company before you leave, and let it know the dates and places you'll be traveling, recommends Marybeth Bond, author of "Best Girlfriends Getaways Worldwide," who offers travel tips on her website. "If you're going to somewhere like Monaco or Luxembourg, that they might not have heard of, make them repeat the names of the countries back to you."
  • Be persistent a merchant says you can't use your card without a PIN, recommends John Morgan, director of credit card products and electronic banking for AAA Financial Services, who works closely with AAA travel agents. "Tell them, 'I know you think you can't take this, but you can. Just swipe it, and follow the instructions on the terminal,'" Morgan says.
  • Make sure you carry your passport or another picture ID. The merchant will want to double-check to make sure you're you, since there's no PIN for added security.
  • If you continue to have problems, call the number on the back of your credit card. "You can call if the card is lost or stolen -- but also if you have problems using it," Bond says.
  • Have a backup plan. It's a good idea to carry two credit cards and an ATM card, plus some cash, Bond recommends. "Carry, not large amounts of money, but about $100 of the local currency on you in case you can't use your credit card," says Bond.

On his recent U.K. vacation, Rhodes says he relied mostly on his debit card, using it to get cash from ATMs, but whipped out his U.S.-issued magnetic stripe credit card to cover a shopping trip to Harrods, the famous London department store and popular tourist destination. "I had no problem," Rhodes says.

Will the United States get smart (cards)?
U.S. residents --especially those who've had trouble buying a latte in France, a bowl of gazpacho in Spain or a Eurail pass in the Netherlands -- might think getting a chip-and-PIN card from a U.S. card issuer would be the easiest solution. It's not that simple.

Because adoption of chip-and-PIN cards would require changing all of the terminals in the United States to the type that can accept either smart cards or magnetic stripe cards, banks and merchants have resisted. "Every checkout line at every grocery store, gas station and convenience store has them. Replacing them would be quite expensive," Rhodes says.

In addition to the number of terminals that would need to be changed, many experts say that the cost of fraud in the United States is considered manageable right now, taking away further incentive to change. "I don't think, based on my discussions with big banks that issue most credit and debit cards, or with card associations, that they envision rolling out so-called chip-and-PIN in the U.S. today," Rhodes says.

Dozens of countries -- from Brazil to Japan to Turkey -- are adopting the new technology or have plans to do so. That could put some pressure on the United States to change with the times. "The technology would work best if every country had chip-and-PIN," Bowerman says, noting that British card numbers are now being used fraudulently more in the United States than anywhere else, since no PIN is required. "Much of the fraud is taking place in a decreasing number of countries, and eventually there will be only one country where it can take place -- the United States."

The Smart Card Alliance's Vanderhoof says it will be more and more difficult for the United States to resist switching to chip-and-PIN, and switch over will eventually happen. In the interim, he predicts that some card issuers will offer U.S. residents a chip-and-PIN card with a magnetic stripe that can be used either way, and will appeal to frequent travelers, but he hasn't heard of any plans to do that yet.

Frequent traveler Maddaloni thinks that would be a good idea -- especially for business travelers. "If you're in a business situation taking out a table full of people, it's not uncommon to have a $1,000 tab," Maddaloni says. "Well, you're not going to carry 1,000 Euros or whatever the local currency is. You want to put down your gold or platinum card."

See related: Anatomy of a credit card, Skimming 101: How to spot it, avoid it, deal with it, Merchants struggle to secure user data, deter identity theft, Silly American: Your credit is no good here

Published: October 1, 2008


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