Credit Cards with Embedded Microchip

A phenomenon that has been sweeping Brazil, China, Japan and Europe for quite some time now is finally spreading across the pond to the U.S. Wells Fargo and JPMorgan Chase will become the first major U.S. banks to test microchip-embedded credit cards. The test market will be affluent customers and frequent travelers, who have complained about having trouble getting their credit cards to work in other countries.

The Problem

According to Bloomberg News, close to10 million U.S. consumers experienced some sort of credit-card approval issues while traveling overseas in 2008. Merchants lost about $4 billion on purchases that could not be made. The credit card issuers were also big losers, down about $447 million in revenue on failed transactions, according to a study by Aite in 2009.

The Solution

Wells Fargo plans to offer a Visa card with a microchip to 15,000 customers, and JPMorgan Chase plans to embed a chip in its Palladium card. The chips contain encoded information, such as the personal information of the cardholder, the card number, expiration date and CVC number. It eliminates the need to run the card through a processor that reads similar information off the magnetic strip on the back of the credit cards.

But if card issuers want a critical mass of American consumers to start looking for chip and PIN on their credit card applications, merchants will need to adopt the technology to accept the new cards. American Express embedded microchips in early Blue cards but took them out in 2005 when the technology had not caught on in the U.S.

The Benefit

Having the embedded chip allows Americans to stay in line with the technology that other countries are using to process credit card transactions. This speeds up credit card purchasing times and aids approval. Travelers will be able to use kiosks, such as those selling metro tickets, that do not accept cards without microchips. Experts say that the chip adds a layer of security to the credit card to alleviate fraud. A PIN is required for every in-person transaction.

Lindsay Curry

Lindsay Curry holds a bachelor's degree from the University of Massachusetts. Lindsay has an extensive background in finance, working for a Fortune 500 company for a number of years. She is a regular contributer to numerous online and print publications, with a focus in personal finance and credit card industry.