New Credit Card Security Chips Could Benefit Both Your Wallet and Your Portfolio

The Target breach may have led investors to a hidden gem. Here's what you need to know.

Jan 15, 2014 at 6:30PM

Like many Americans who shopped at Target (NYSE:TGT) during the holiday season, I recently received a replacement credit card from my bank as part of an effort to prevent fraud from potentially compromised credit card numbers.

For those of you like me, you may have also noticed that your new card includes a gold or silver security chip prominently displayed on the front of the card. While this may appear new to most of us in the US, these chips are actually an additional security feature that has been common place internationally for well over a decade.

Technically, this chip is part of the EMV standard, named for the three companies, Europay, MasterCard, and Visa who developed the standard. It contains the same personal information found in the strip of a standard credit card, but because it uses modern technology – versus the comparatively ancient magnetic tape technology that has been around since the mid-1900s—the data is encrypted and much harder for ne'er-do-wells to access or duplicate. In many cases the chips also provide an additional layer of security by requiring users to enter a PIN each time they pay with the credit card, in the same manner Americans are familiar with from ATM withdrawals and debit card payments.

If this technology can be used to prevent fraud, why hasn't it been widely adapted in the US? Mainly because to date, merchants and banks have believed that the risk associated with the legacy system was not large enough to justify the costs necessary to upgrade existing infrastructure to accept what are known colloquially as "smart" or "chip and PIN" cards. Historically, losses due to credit card fraud have been manageable — only 5 cents per $100 — but increasingly this doesn't reflect the full story. 

Large scale data breaches are intensifying the need for better security
Hacking incidents like those at Target and Neiman Marcus are occurring on such a large scale that they change the playing field. Besides the direct impact of huge numbers of stolen credit cards flooding the black market (in Target's case, upwards of 70 million accounts were compromised), the resulting negative press and brand damage could result in reduced sales that are orders of magnitude larger than the losses from traditional fraud. In Target's case, they have already said that as a result of the breach, they expect same store sales could be negatively affected by 2%-6% -- which in real money terms could be upwards of a billion dollars forgone. 

Even before this most recent batch of incidents, MasterCard and Visa recently mandated an adoption timeline for EMV that would require retailers and banks to upgrade by October 2015  or else face increased liability exposure for using older, less secure systems. Taken together with the wake-up call offered by the relentless press coverage of the Target incident, it appears that the impetus to finally push the US companies to adopt modern payment security systems may have arrived.

Verifone and NCR could be Foolish possibilities for your portfolio
How can you position you portfolio to benefit from this coming trend? Look toward companies like VeriFone (NYSE:PAY) and NCR (NYSE:NCR). They provide the point-of-sale (POS) and ATM systems used at the vast majority of retailers and banks that currently accept plastic. For the time being, most "smart" cards that include the "new" EMV chip still also include a magnetic strip that works with existing equipment. However, for the new standard to be truly effective the strip will need to be eliminated and this means that point of sale (POS) terminals used to read the cards must be upgraded to new ones. New POS systems can offer other benefits as well, like being able to accept contactless payment via NFC devices such as many modern mobile phones.

VeriFone in particular may be a good way to play this trend over the next 12-18 months. The stock has showed signs of a technical breakout over the last few weeks after underperforming in 2013. Expectations are still low after several years of issues concerning historical accounting errors and questionable acquisitions. However, with new management in place that is focused on recapturing lost device market share, there could be room to the upside on the stock, as noted by JPMorgan who on Tuesday upgraded the stock from neutral to overweight.

Why your credit card may soon be worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them-but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless-and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Fool contributor Russell Bisker owns VeriFone. The Motley Fool has no position in any of the stocks mentioned. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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