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, Master-Card 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.
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.
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."
Back believes the already PIN-debit savvy Canadians will make the leap to chip and PIN technology with minimal adjustment. "The front-end software has been written on the terminals; the applications are written on the chip; and the specifications have been figured out," he said. "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."
The magnetic stripe continues to co-exist with chip card technology so that customers can use their cards at non chip-enabled terminals. 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."
Back said every merchant in Canada will have a chip-enabled terminal, and every cardholder will have a smart card. "It's a huge shift in the market - 30 million people and a million businesses will need card and terminal upgrades," he noted. "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, but most of the larger retailers are already geared up for a national roll out."
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 retooling a transaction processing system that is seen by many in the industry as efficient and firmly entrenched.
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