Why Don't American Credit Cards Use Chips?

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When you use a credit card at a retailer in the United States, the card goes through a device that reads the account information encoded on the magnetic stripe on the back. But that's not how it works in much of the rest of the world, where cards have embedded microchips that carry account information in a more secure format. The main thing hanging up chip cards in the U.S. is cost.


Chip cards, also called smart cards, grew out of European efforts to increase the security of credit card transactions as the economies of European nations became more intertwined in the 1990s. The technological and security standards that ultimately developed for chip cards came to be known as "EMV" standards, named for the organizations that created them: Europay (a dominant European card brand of the era), MasterCard and Visa. EMV has become the credit-card payment standard in most of the world, with one notable exception. That exception is the United States, the biggest credit card market of all, with more than a billion cards issued under the Visa, MasterCard, Discover and American Express names, and countless others issued through merchants.


Retailer resistance has been a major obstacle to EMV becoming the standard for credit cards in the United States. It's not simply a case of stubbornness. The cost of fully converting to EMV-ready systems in the U.S. has been pegged at about $6 billion, with about three-quarters of that cost borne by merchants. Individual retailers worry about spending thousands of dollars on new terminals and other equipment to process payments in an era when even cutting-edge technology can rapidly become obsolete. Meanwhile, chip cards often also have a magnetic stripe as a "backup," so U.S. merchants still don't lose sales when customers do have EMV cards.


Card issuers present another roadblock to EMV. Issuers are the banks, stores and other institutions that actually provide cards to their customers. (Visa and MasterCard are not issuers. They provide branded services to issuers.) It costs less than a dollar to produce a magnetic-stripe card and send it to a customer; EMV chip cards cost more than twice as much. With retailers reluctant to shift to EMV, issuers feel little pressure to replace the stripe cards already in their customers' wallets with the more expensive chip cards. And in a kind of feedback loop, the fact that so few potential customers are carrying chip cards serves to reduce the incentive for retailers to upgrade their equipment.


If American consumers demand something, they usually get it. But with neither card issuers nor retailers rushing toward the EMV standard, domestic consumers haven't been clamoring for EMV credit cards. Those who travel outside the U.S. may have a need for a chip card, as retailers in foreign countries often aren't set up to take cards that have only a magnetic stripe. That's why some issuers, particularly large banks, make EMV cards available to those customers who need them, but there has been no wholesale commitment to replace all cards.