How Chip Cards Work

by Colin Berkshire

I am getting asked a lot about how the chip on credit cards work.

I will give a simple explanation.

When you make a chip-based purchase the credit card number and a passcode stored in the chip is sent to the bank. When the purchase is authorized the bank sends back a new passcode which is then stored in the chip.

Thus, every time you make a purchase the passcode stored in the chip is changed. It is a one-time-only code. So you can’t copy it or fake it. (If you did you would get only one transaction and the card would never work again.)

In addition, the passcode is encrypted so it can’t be easily read. (Well, OK, it can as it turns out, but that doesn’t really matter.)

The rest of the world also uses a PIN that you remember. This keeps the credit card from being able to be used if it is stolen, and prevents fraudulent online transactions where you just key in the credit card number.

Banks haven’t implemented the PIN in the US because fraud is so profitable, and the fastest growing fraud-profit is in online transactions. The banks really don’t care if you get mugged and your credit cards are stolen and used because they make a 3% to 4% profit on those transactions. (They just push the fraud onto the merchant that doesn’t know you are bleeding and laying on the side of the road.)

Nice banks.

Not really.