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Wednesday, May 14, 2008

Canada piloting chip and PIN

To enhance data security, as well as reduce credit and debit card-related fraud and identity theft, the Canadian payments industry is rolling out a chip and PIN smart-card payments program in Kitchener-Waterloo, Ontario.

The pilot program, which will run through October 2008, will render all 90 local area merchants' POS terminals compliant with the Europay International, MasterCard Worldwide and Visa Inc. (EMV) smart-chip-card standard.

EMV standards are already operative in Europe and require PIN entry with credit card transactions; Canada's target EMV implementation date is 2010.

Plans for this trial began in October 2007. Since then, nearly 200,000 cardholders in the pilot area have received chip-enabled debit and credit cards to use for day-to-day purchases. And more than 2,300 POS terminals, 65 percent of automated teller machines and 100 percent of financial institutions have been updated to accept the new cards.

A chip off the old card

Chip-based debit and credit cards are embedded with a device that can be read only by chip-enabled terminals. The device enables the card to securely store and process data.

Cardholders will notice two distinct differences when paying for goods with a chip card:

  1. The card inserts into a card-present reader and remains in the terminal – and in sight of the cardholder – for the duration of the transaction.

  2. Cardholders enter a PIN number, just as they do for debit cards, and no longer need to sign a sales receipt. Chip and PIN cards will continue to have a magnetic stripe on the back to ensure acceptance in countries, such as the United States, that have not migrated to chip.

In describing the nature of chip and PIN transactions, Michael Back, President and Chief Executive Officer of Collective Point of Sale Solutions Ltd. in Woodbridge, Ontario, said, "If you really want to boil it down, what it does is take a credit transaction that used to be swiped and imprinted and makes it a PIN transaction."

Processors, merchants, consumers ready

Back believes the already PIN-debit savvy Canadians will make the leap to chip and PIN technology with minimal adjustment. "It's pretty exciting that it's actually here," Back said. "The front-end software has been written on the terminals; the applications are written on the chip; and the specifications have been figured out.

"The processors involved in the pilot have all figured out the back end. There's certainly going to be some bugs, but the whole intention of the pilot before Canadian financial institutions do a national roll out is to work out the kinks. Also, consumers aren't used to entering a PIN for a credit card transaction, so there's going to be some learned behavior, but I haven't heard anything negative about the pilot."

Back believes that the adoption issue is a bigger hurdle than a trust or confidence factor, since the cards are Visa Inc. and MasterCard Worldwide branded. Additionally, Canadian financial institutions are either Payment Card Industry (PCI) Data Security Standard (DSS) or EMV compliant.

Mag stripes vulnerable

The magnetic stripe continues to co-exist with chip card technology. The mag stripe, for now, will remain on the card so customers can use their cards at non chip-enabled terminals. However, industry experts see this "amenity" as a hindrance to fully securing chip-enabled cards.

Adam Atlas, Payments Attorney and President of the Canadian Acquirer's Association, is not sanguine about mag stripe elimination anytime soon and is concerned that chip and PIN cards will remain vulnerable as long as the mag stripes remain.

"I don't know if the cards in this pilot program will have magnetic stripes or not, though I don't see how they could get rid of the mag stripe right away since the chip POS devices are not all that common yet," Atlas said. "Some of the fraud that's happening today is going to continue and won't be eliminated completely as long as there is a mag stripe."

Massive undertaking

Back knows there will be some bumps along the way with such a massive undertaking. "We will get there. Every merchant [in Canada] will have a chip-enabled terminal, every cardholder will have a smart card," Back said. "It's a huge shift in the market – 30 million people and a million businesses will need card and terminal upgrades. Banks will even subsidize smaller merchants to upgrade legacy systems and convert to chip and PIN.

There will be financial incentives because conversion is mandatory. We're dipping our toe in the water right now, bust most of the larger retailers are already geared up for a national roll out. It will certainly prove interesting over the next few months."

Despite the benefits of increased security and lower dollar amounts of fraud, the U.S. market has not yet created a business case to move forward with EMV adoption. This is due to the huge costs of changing the entire transaction processing system from host to POS. end of article

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