LAST week Barack Obama issued an executive order requiring the federal government to issue new “chip-and-PIN” credit and debit cards. The administration describes the order as part of an effort to help “drive the market towards more secure payment systems.” That’s right: like most Americans’ credit cards, the cards that the government sends to millions of people for social security payments, government-employee pensions, and veterans’ benefits use the old-fashioned technology of magnetic strips and signatures. European readers, who are used to using PINs with their microchip-enabled credit cards, are no doubt aghast. Why has it taken America so long to adopt the anti-fraud measures that continental consumers have used for years?
Chip-and-PIN credit cards are designed to reduce fraud. They don’t end it, of course. But they help—the adoption of chip-and-PIN in Britain dramatically reduced the rates of some types of card fraud. America is the only rich country that still relies on magnetic strips and signatures for most credit-card transactions. It is also the only one in which the market in counterfeit credit cards is still consistently growing. Retailers, banks and card issuers lost $5.3 billion to credit-card fraud in America in 2012—about half the global total. Here’s the trouble: upgrading cards (there are over 1 billion in circulation in America) is expensive. New card-readers are even dearer: upgrading all of the readers in America would cost hundreds of millions of dollars.
But America’s reluctance to adopt the new technology is about more than just upfront costs. After all, European companies faced the same obstacles. There are two main reasons for the split. The first is technological. During the 1990s American credit card companies got much better at detecting potentially fraudulent purchases and stopping them at the point of sale. Their European competitors didn’t quite keep up. That meant Europe had a disproportionate incentive to switch to chip-and-PIN. The second difference is regulatory. Since European credit-card companies are responsible for paying most of the costs of fraud, they have a significant incentive to reduce it. American credit-card companies, which operate under looser regulations, have been able to pass on much of the cost of fraud to retailers and even consumers, and thus have had little incentive to spend money to reduce the costs of fraud.
Since retailers are responsible for a good chunk of the costs of fraud in America, they are now leading the way in making the switch to chip-and-PIN. Home Depot, Target, Walgreens and Walmart—four of America’s largest chains—have already made the change, spending oodles of money on new chip-and-PIN-compatible card readers. The credit-card companies will up the pressure on retailers next October, when they begin requiring the party with the least-sophisticated technology to cover the cost of fraudulent transactions. As the (probably apocryphal) Winston Churchill aphorism goes, you can always count on the Americans to do the right thing—after they have tried everything else. Now you just have to come up with a good PIN.