Chip and PIN or Chip and Signature?

OK, there’s lots going on here. Read slowly and wrap your brain around this. So which offers more security? Chip-and-PIN or chip-and-signature for your card payments? Chip-and-PIN wins. This is due to two authentication forms: the card and the PIN, which is stored in your head (or should be, anyways, rather than on some small piece of paper crinkled inside your purse).

1CBut chip-and-signature has its virtues for all involved. One reason is that most people don’t know their credit card PIN, something like 5-10 percent knowing it. If credit card payments were only via chip-and-PIN, consumers would memorize their PINs very quickly.

Another issue is that only one-fourth of U.S. POS terminals have a PIN pad. This means a lot of money spent by merchants to accommodate a chip-and-PIN-only environment with updated POS terminals.

On the other hand, this investment can pay off because, says a 2013 Fed Payments Study Summary, PIN debit transactions come with a much lower fraud loss rate than do signature transactions.

A PIN based transaction brings unwanted issues to some merchants, e.g., car rental companies requiring preauthorization transactions prior to the final transaction amount. Car rental and lodging companies, however, better like the signature based transaction because it has a separate authorization and settlement process.

Other merchants, too, must make some big decisions, such as the restaurant industry: To accommodate customers who want to use their mobiles for payments at their table, restaurants will have to pay a pretty penny for terminals.

The chip-and-PIN comes with a human based flaw: If a buyer forgets their PIN, the transaction will be incomplete. The signature based transaction has the signature to complete the transaction.

All of these pros and cons must be carefully considered among consumers, merchants and the card payment industry. But what bankers and merchants seem to agree on is that the magnetic strip is getting very old and needs to be replaced by a more secure technology: the chip.

Robert Siciliano is an Identity Theft Expert to AllClearID. He is the author of 99 Things You Wish You Knew Before Your Identity Was Stolen See him knock’em dead in this identity theft prevention video. Disclosures.