Square, a mobile payments company, recently announced that it is launching a card reader which will accept payments from chip cards. The US credit cards are mostly swipe and sign, which entails use of the magnetic swipe. However, this system is loaded with multiple instances of fraud and a chip based setup is expected by fall 2015.

Square hopes to become the first company to offer small and medium size businesses less expensive alternatives to getting new credit card point of sale systems. These systems use a chip contained in the credit card which works as a mini computer. Instead of swiping quickly the POS, a unique code is created for each transaction and the consumer is asked to enter a pin associated with the card instead of using a signature.

However, this is not new technology. It was first introduced in 1994 as a way to combat card fraud. So why has the US not incorporated it yet?

Better late than never?

Many US outlets have been planning on moving to chip based cards for many years. 2013 was a terrible year for card fraud in the US, with Target reporting the loss of about 40 million credit card numbers. Although it has been reported that Target’s breach was as a result of malware, chip systems would probably have mitigated some of this risk.

Chip based systems have not been fully incorporated into US markets. As of October 1st, only 27 percent of merchants in the US plan to use this mode of payment, according to Strawhecker Group.

The long wait

The United Kingdom was one of the first countries to introduce chip-based cards. With magnetic stripes, what typically happens is that the merchant stores up approved transactions all day, and would send the credit card details back to the card issuer for verification at the end of the day which gave criminals more time to commit fraud. In the early 2000s, it was cost effective to use pin-based cards. Aite Group reports that fraud from lost or stolen cards decreased almost 44 percent.

But migrating an entire payment system is not a small hurdle. It can be compared to making US drivers switch to driving on the left side of the road and changing road signs. All that analogy is quite dramatic, it just conveys how hard it is to convince merchants that they need new point of sale terminals.

Pin based cards are not completely fraud proof either. The Computer Laboratory at the University of Cambridge shows that it is possible to hack card-reader terminals so that it accepts any PIN a criminal might input. With a change to pin based cards, concerns about liability are bound to arise. It could mean that both parties (customer and merchant) are liable in case of fraud. Credit card companies are known to charge high fees to cover fraud liability.

According to the Nilson Report, in 2012, the US accounted for less than a quarter of the worlds’ payment by card transactions, but recorded almost half of the fraud cases. These numbers indicate that it is time for something new to happen and a chip and pin system may have to be it.