Credit Cards


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You have probably already heard about how between Nov. 27 and Dec. 15 credit and debit card data was stolen from 40 million of Target's (NYSE:TGT) customers in the second largest scam of this kind in U.S. history. The theft is second only to TJX Companies' (NYSE:TJX) 2007 breach, which ended in 100 million corrupted accounts and cost TJX $256 million.

Since the moment Target officially acknowledged the hack, there have been mountains of speculation and rumors regarding what the effect of this historic debacle will be to Target. 

These shocking revelations have also raised the question as to how safe America's credit and debit cards truly are. In 2013, how could it be possible that 40 million accounts could be breached before anyone noticed something wrong?

America is easy prey
Surprisingly, the answer to this question is because American credit and debit cards are years behind the rest of the world in technology. The last time the American credit cards got a significant security boost was back in the 1970's with the introduction of the black magnetic strip. 40 years later, crooks are finding it easy and lucrative to steal the data necessary to produce counterfeit cards.

The technology level of the current magnetic strips is equal to that of cassette tapes. It is simply as easy as copying the information provided clearly on the magnetic strip for hackers. Instead, the rest of the developed world uses (or is very close to using) "smart" chip-based cards.

These cards, which you can find in almost any major country excluding the U.S., use digital chips to hold account information. The chip generates a unique code every time the card is used, making it hard to nearly impossible for hackers to steal information off these cards.

Mallory Duncan, general counsel at the National Retail Federation, put the U.S. situation into perspective:

"We are using 20th century cards against 21st century hackers. The thieves have moved on but the cards have not."

Fear not, by October 2015 America will have swiped its last card
The plan has always been for the U.S. to switch over to these "smart" cards, but switching over all of the infrastructure to be compatible with this new technology is going to be very expensive. This explains why it is taking the U.S. so long to adopt "smart" cards. Additionally, the cost of fraud to big business is minuscule in the grand scheme of things. According to the Nilson Report, the record $11.27 billion in global fraud last year only accounted for $0.052 out of $100 in transactions.

Nevertheless, the major card companies, Visa (NYSE:V), MasterCard (NYSE:MA), and American Express (NYSE:AXP), have already set October 2015 as the deadline for U.S. retailers to switch over to cards with chips.

The massive media coverage the recent Target debacle is getting could speed up this process says David Robertson, the publisher of the Nilson Report. He commented, "Because it's so high-profile and it came along right at this time of year, this could spur U.S. financial institutions to move more quickly."  

Whenever they finally do appear, these new "smart cards" will represent a long-overdue step in the right direction for consumers. The same can not be said for retailers, however.

The amount of money that retailers such as Target and TJX will have to spend updating all of their locations will result in massive costs. Yes, consumer confidence in their card security will improve, but none will gain any advantage since all retailers are required to switch over to the new system.

The plus for retailers is that the probability that something like Target's massive breach happening again will be reduced. This could be a potentially huge money saver.

For card companies, this switch-over isn't going to be a major profit-eater. While they will have to spend money to update their systems and issue new cards, in the long-run the switch is a good thing and should reassure potential cardholders that the process is secure. 

The Foolish conclusion
It had already been established that by October 2015 the U.S. would become a "smart card" nation, but now as a result of Target's major slip up, the switch could happen sooner than that. Who stands to benefit? Above all else, American consumers, who as a result of this technology should have to deal with less fraud.

On the other end is retailers, who are being forced to spend millions to accommodate to this new technology.

Somewhere in between these two are the card companies, which will have to spend money to update their infrastructure but in the long run are improving the overall credit card system. 

Swiping that iconic black strip has become something as American as apple pie, but soon enough this storied tradition will go the way of the dinosaur.

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Ryan Guenette has no position in any stocks mentioned. The Motley Fool recommends American Express, MasterCard, and Visa. The Motley Fool owns shares of MasterCard and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.