Credit Card Blues: Relief in Sight for Int’l Travelers

Credit card issuers are quietly changing the ways card payments are accepted and verified, a trend that is good news for travel managers and business travelers whose itineraries include Europe.

Chip and PIN charge cards, which use an embedded computer chip rather than the traditional magnetic strip, are creeping into the U.S.

Chip and PIN cards have been standard in Europe for nearly a decade, creating a headache for U.S.-based travelers who do business there. U.S. travelers regularly report that their cards are declined by European merchants because they don’t have an embedded chip.

“All European merchants are obliged to accept cards that have only a magnetic stripe, like most U.S. cards. But that doesn’t mean that all of them do,” said Kevin Kane, CTP, managing director and head of sales, global treasury management, BMO Harris Bank.

Fear of fraud
Merchants’ concerns about credit card fraud is the prime reason many don’t accept magnetic-stripe cards. Chip and PIN cards, which require the customer to enter a PIN code to complete a transaction, “ are much more secure than magnetic stripe cards,” he explained.

Card issuers have seen a greater than 70% drop in credit card fraud since the introduction of chip and PIN, said Steve Pedersen, vice president, North American corporate cards, for Bank of Montreal.

Issuers and merchants like that additional security – as do travel managers, who can spend less time on card fraud and more time managing their travelers and program details, Pedersen said.

Barriers to change
So why hasn’t chip and PIN come to the U.S.?

One reason: Although point of sale equipment providers have been building chip readers into card terminals for some time, merchants haven’t wanted to replace their point of sale equipment, Kane said.

Card issuers in other jurisdictions have greater leeway to require specific point of sale technologies and incentivize retailers to switch. In the U.K., for example, chip and PIN was tested in 2003 and rolled out nationwide in 2004.

“Customers with international travel have been recognizing the need for chip and PIN since at least 2006,” Kane said.

For their part, card issuers in the U.S. have been slow to make chip and PIN a standard offering because, until recently, adding a chip raised significant production costs for each card.

Falling costs
Now the combination of falling production costs for chip-enabled cards, rising international travel and international card use and dramatically higher fraud losses on magnetic stripe cards has changed attitudes, Kane said.

BMO rolled out chip and PIN with its Diners’ Club product in 2011. “We have it available with our MasterCard products for customers who need it. So do most other card issuers in the U.S.,” Kane said.

Today, most card issuers will provide corporate chip and PIN cards for free – if asked.

Banks retrofitting ATMs
BMO is in the process of retrofitting all of its automated teller machines in the U.S. with chip readers. The retrofit should be completed by April 2014, Kane said. Other banks are making similar moves.

“The total cost of migration to a more secure payment system in the U.S. will be large,” he said. “But bringing the U.S. up to global standards has a huge benefit. Fraud reductions are funding the rollout. That leaves us more flexibility to enhance profit sharing with companies through their corporate card programs.”

Move to mobile?
Even as card issuers move toward chip and PIN, consumers are moving in another direction – toward mobile payment using smartphones.

Precisely how mobile payment will play out isn’t clear, said Patrick Diemer, chairman and co-managing director of AirPlus International. While there are multiple competing technologies, consumers in Asia and Europe are flocking to mobile payment.

“Mobile wallets and e-wallets will be the ultimate consolidator in payments,” Kane said. “It will be a long, slow transition, particularly in the U.S. But we see mobile payment taking over eventually.”

Next: Experiments in mobile payment and why the U.S. may leapfrog chip and PIN