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How Chip Cards Work

by in Telecom

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.


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  • Thomas Smith

    Nice banks. Not really.—–
    No kidding, after the experience of going through a multi-year dispute with a bank (WAMU) over an issue that was CLEARLY and UN-MISTAKENLY their error from outset — I learned so well who essentially writes and controls the laws governing banks. (Hint it is the financial community).

    Dealing with their legal representation was without question like dealing with a soul-less entity. All because they never wanted to admit they were wrong. After 5 years we finally went to court – they settled before ever walking into the court room — but they could care less about what they had done to my life over those 5 yrs. Banks are business – and sometimes a very nasty business at that.

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Colin Berkshire is a highly technical HR executive in the Pulp and Paper Industry. Colin has an engineering and voice background, and is currently on assignment in Asia. NOTE: Colin does not respond to comments, and does not Tweet.