Chip-and-PIN Card: Definition, Features, vs. Chip-and-Signature

What Is a Chip-and-PIN Card?

A chip-and-PIN card is a type of credit card that requires the cardholder to authorize the transaction by entering their personal identification number (PIN), much as they would with a debit card. Chip-and-pin cards are less susceptible to fraud than previous generations of credit cards.

How Chip-and-PIN Cards Work

Unlike earlier credit cards, which had a magnetic stripe containing information about the card and cardholder, chip-and-PIN cards have an embedded, square-shaped microchip, called an EMV chip, that not only carries similar information but also generates a unique code for each transaction.

When making a purchase, chip-and-PIN cardholders insert their card into the merchant's point of sale (POS) terminal, or wave it over the terminal, so that the microchip can be read by the machine. The POS terminal then prompts them to enter their PIN, in order to authorize and complete the transaction.

With the older magnetic stripe technology, cardholders swiped their cards through the POS terminal and then signed a receipt. In addition to the fact that information on magnetic stripes is less secure than it is on microchips, this system had several other disadvantages.

For one thing, magnetic stripe cards often required merchants to retain large amounts of paper records, which could easily become lost or faded over time. Moreover, sales clerks often failed to verify that the signature provided by the customer matched the one shown on the back of their card, making it easy for a criminal to produce a fake signature when using someone else's credit card.

Chip-and-PIN cards improved on both of those limitations. Because the POS system can automatically detect whether a correct PIN was provided by the customer (and accept or reject the transaction as a consequence), the merchant doesn't have to retain paper records in case the transaction is later challenged. The use of a PIN also bypasses the need for employees to verify that the signature matches the one shown on the card, a process that can slow down transactions and annoy customers.

Chip cards also benefit cardholders because they are far more difficult to counterfeit than magnetic stripe cards. With the latter, thieves could use a technique called skimming to steal the information on the card. They'd install a device on, for example, an ATM or a gas pump, which would read the credit card information when the unwary customer swiped their card. The thief could then use that information to create a fake card and run up charges on it. With microchip technology, a card generates a new transaction code each time it is used—information that is unusable for additional transactions.

Chip-and-PIN Cards vs. Chip-and-Signature Cards

An alternative to chip-and-PIN cards are chip-and-signature cards. As you might expect, these cards require the customer to sign as part of a transaction rather than enter a PIN. While chip-and-signature cards benefit from the security features of EMV chips, they are considered more vulnerable to fraud than their chip-and-PIN counterparts because a thief might be able to fake a signature but not provide a PIN unless they know what it is. In many situations with these cards, merchants will not even request a signature to speed things along, making them all the more vulnerable.

Chip-and-signature cards are the most common type in the U.S., while chip-and PIN-cards are in wide use elsewhere in the world.

The Bottom Line

Chip-and-PIN credit cards are a more secure way of conducting credit card transactions, for merchants and customers alike. While they are not in wide use in the U.S., compared with chip-and-signature cards, they may be soon—unless something even more sophisticated comes along in the meantime.