Note to Merchants: Like It or Not, Chip Cards Are Coming

If you're a merchant, you've no doubt heard of the chip card. It's a credit card that holds all of the necessary information in a small computer chip rather than a magnetic stripe.

But you may not have seen one. That's because they're virtually nonexistent in the United States, even though they're widely carried in the rest of the world, where they're regarded as a more secure alternative to the old mag-stripe card.

So why aren't chip cards more popular in the United States? The answer depends on who you ask. Banks say chip cards aren't widespread here because merchants won't invest in the new card readers they need at the checkout counter and this makes the cards impractical for consumers. Merchants say they don't want to spend on new card readers until the issuing banks commit to investing money in the more expensive chip cards and pushing them out to consumers on a broad basis.

So Who's Right?

Merchants have a pretty good case. Walmart has gone ahead and spent a lot of money to put chip-card readers at its registers, but the readers don't get a lot of use because most customers are still carrying traditional magnetic-stripe cards, not the newfangled chip cards.

Issuing banks also have a reasonable argument. Most merchants, unlike big-bucks Walmart, haven't invested in the new card readers and decline when customers brandish a chip card. And besides, banks ask, why should they put billions into chip cards when more advanced technologies -- such as cell phone payment -- may soon make chip cards obsolete?

And the winner will be … probably neither merchants nor banks. The card companies, Visa and MasterCard, are strongly behind chip cards, and they have a sweet carrot and a sharp stick to ensure that the cards will soon be accepted. Both the carrot and the stick are aimed at merchants.

Visa, which makes a lot of money not only from its cards but also from its large electronic-payment-processing network, recently announced that it has developed a new countertop terminal that will accept magnetic-stripe cards, chip cards, and cell phone payments.

"We believe that as merchants start to move, the card issuers will see the merits as well," Ellen Richey, chief enterprise risk officer at Visa, told The Wall Street Journal recently.

Sticking It to Merchants

To shift merchants out of neutral, Visa announced that, starting in October 2012, merchants that are using its new terminal for at least 75 percent of Visa transactions will be exempt from the current Visa requirement that they prove they comply with industry fraud-prevention standards.

And if this isn't enticing enough? That's where the stick comes in. Beginning in 2015, merchants that aren't using the new Visa terminal could have to shoulder the cost of any fraud that results from a transaction in which a chip card is offered but not accepted. (These costs are currently paid by the issuing bank.)

So let's put that in plain English. You're a merchant and a customer tries to pay with a chip card. You don't have the new Visa terminal so you ask for a magnetic-stripe card instead. Then, somewhere down the line, an identity thief gets that card information and goes on a spending spree. Guess who pays the bill? Yup, you do.

Please pass the chips.