EMV Chip Cards 101 for Small Businesses

by TaxJar November 1, 2020

Editor Jenn’s note: There’s a lot of confusion out there about the transition to chip cards, so we asked our friends at Square to write up this explanation in plain English. 

There’s a sea change underway in the payments landscape. Cash and checks are on the wane, and credit cards and digital payments are on the rise. And overall, there’s a movement towards more secure, authenticated forms of payment like EMV chip cards (and also mobile payments).

As a business owner, that means you have some action items. Here’s your 101 guide to EMV chip cards and mobile wallets — and the next steps you need to take to make sure you can securely accept any form of payment. 

Why are magstripe cards going away?

Magstripe cards have been around for decades. They’re so dated that they run on the same technology as cassette tapes, which, unfortunately, makes them ripe for security issues. The data on the back of a magstripe card is static. During a transaction, bank details are broadcast into the payments terminal as-is. This all makes them extremely vulnerable to counterfeiting. All fraudsters would have to do is use a skimmer (something they can get for less than $20) to extract bank details and then clone them onto a new card. 

As a result of being one of the last magstripe card markets, the United States has particularly widespread fraud. In fact, half of the world’s credit card fraud happens here, even though only a quarter of all credit card transactions happen here. So we’re transitioning over to EMV as the credit card processing standard in an effort to cut down on fraud. 

What is an EMV chip card?

It’s likely you’ve received a new card from your bank lately — one that has a tiny chip in the corner. This is an EMV chip card. EMV (which stands for Europay, MasterCard, and Visa) is now the new standard for credit card processing in the United States. The banks are issuing these new cards en masse, with the Payments Security Task Force projecting that 98 percent of cards will be chip enabled by the end of 2017.

Why are EMV chip cards more secure than magstripe cards?

That chip in the corner of an EMV card is actually a tiny computer with enhanced security features. The chip is encrypted, meaning the information (i.e., your bank information) on it is constantly changing. This makes it extremely hard for fraudsters to isolate data and extract anything meaningful. To rip it off, they’d have to get into the physical chip circuit, which would require very costly high-tech equipment.

The actual transaction is also a lot more secure. When you dip a chip card (it’s a dip instead of a swipe), it talks back and forth with the payments terminal in a secret language to make sure it’s actually you who’s paying.

How do you process EMV chip cards?

Chip cards are processed differently than magstripe cards. They’re dipped instead of swiped and remain inserted into the reader for the entire transaction (which can take several seconds). Because of this, businesses need to get a new POS in order to accept chip cards. The Square contactless and chip reader accepts chip cards and is just $49.

Why do businesses need to accept chip cards?

In short, because you’re putting yourself at risk if you don’t. Due to something called the EMV liability shift, which went into effect in October 2015, businesses that aren’t set up to accept chip cards could now be on the hook for certain types of fraudulent transactions (whereas previously the banks ate this cost). The liability shift is an effort on the banks’ part to help accelerate the nationwide adoption of EMV and thus curb fraud. So to avoid being saddled with unwanted charges, you should upgrade your POS ASAP to accept chip cards.

Why are chip cards so slow?

If you’ve paid with a chip card at a merchant already, you may have noticed that it’s slow to process. Quite slower, in fact, than magstripe cards. When the card is inserted into the reader, the technology is working to spot anything fishy — so it’s a good thing when it comes to security. But the sluggishness can be annoying. 

As consumers and merchants alike continue to notice that chip cards are a less-than-ideal experience, it’s likely we’ll see the acceleration of another payment technology: NFC. NFC, which stands for near field communication, is the technology that underpins mobile wallets like Apple Pay, Android Pay, and Samsung Pay. NFC mobile payments are just as secure (some may argue more secure, with fingerprint technology protecting your phone) than EMV chip cards, but much, much faster. They process near instantaneously. In countries that have already adopted EMV as the credit card processing standard, the adoption of mobile payments has picked up.

So what does this all mean for your small business? It’s time to update your POS. To protect yourself from the liability shift, you’ll want to get set up to accept chip cards. And to make sure you’re primed for what’s coming quickly down the pipeline, you’ll also want one that accepts NFC mobile payments like Apple Pay. The Square contactless and chip reader accepts both EMV and NFC payments. 

Questions about EMV, NFC and other payments acronyms? Start the conversation in the comments!

Learn More About Square

Square creates the tools businesses need to unlock the value of every sale. Square’s register service is a full point of sale with tools for every part of running a business, from accepting credit cards and tracking inventory to invoicing and real-time analytics.Please note: This blog is for informational purposes only. Be advised that sales tax rules and laws are subject to change at any time. For specific sales tax advice regarding your business, contact a tax advisor.

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