Chip technology is the new frontier in secure and efficient electronic transactions

With almost full adoption of chip technology by local banks as a way of securing cards, besides the traditional use of a PIN (personal identification number), the stage is set for greater adoption of this method of payment in Kenya.

It is laudable that the Kenya Bankers’ Association and the Central Bank of Kenya (CBK) have been actively involved in this drive.

Greater use of debit and credit cards will not only improve safe, secure, and convenient trade within the country and the region but also between Kenyans and their businesses with peers from other parts of the world.

Despite the recent ascendancy of other means of payment for transactions, the use of cards remains one of the most widely accepted globally.

Still, greater adoption of this mode of payment has always been constrained by what were previously well-founded concerns about security.

SECURE ELECTRONIC TRANSFER
It was out of these concerns that the three major electronic payment companies in the world — Europay, Mastercard, and Visa — came together in the mid-1990s in a partnership to find a common solution to manage, maintain, and develop chip technology, better known as the EMV card chip.

Now, 14 years later, the innocuous little chip that sits on the left side of plastic cards, has made electronic payments more secure and faster in a manner that was hitherto unimaginable with the magnetic strip technology it replaced.

And it matters little whether the cardholder is in a coffee shop in Nairobi or a jewellery shop in New York. The chip provides three key safeguards: it can store information, process it, and is also capable of keeping secret information and processing it. The card works like a mini computer; always processing information.

It is thus impossible to clone the chips and the circuitry that makes them work. Each chip and card are unique. If someone tries to pull a chip off one card and place it on another, the circuits that run through the card are destroyed.

When using the card to make a purchase, the card must come in contact with an acceptance terminal. The terminal reads the card and activates the chip, which verifies that the card is authentic and that the owner of the card has sufficient funds to complete the purchase.

ADDITIONAL SECURITYT FEATURES
Magnetic strips, which were the industry standard previously, had become easy to copy or clone and the focus of fraudulent activity. Once the magnetic strip was read by the terminal, the card would no longer be needed as all the data would be transferred to the terminal.

The terminal would perform all the processing. It would be easy for fraudsters to swipe the card and retain all the data within a terminal and use it to create a new cloned card.

The chip also allows the issuing bank more flexibility in determining and enforcing payment rules. These can be customised to include a number of additional security features such as verifying the cardholder’s identity through a PIN or written signature.

The bank can define the rules and programme them into the chip, depending on the level of security deemed necessary.

The use of chips has saved banks massive costs in fraud investigation globally. The use of EMV chips has considerably cut the number of cloned cards that were previously used in suspect transactions.

INCREASE IN CARD HOLDERS

Fraud costs banks money in replacing counterfeited cards, besides compensating those who have lost money. Consumers also have to bear the costs and suffer the attendant inconvenience.

In Kenya, the adoption of the chip and PIN cards is expected to deepen the use of the cards, not just at ATMs, as has been the tradition, but also at various merchants or points of sale (PoS).

This is expected to be spawned by increased trust and the emergence of a bigger and consumption-driven middle class.

The 2013 Kenya Financial Sector Stability Report by CBK shows that the number of active cards in the hands of Kenyans increased from 10.7 million to 11.5 million in 2013.

PoS terminals grew 14.1 per cent to 21,089 over the same period due to wide acceptance of settlements through payment cards and expansion by merchants.

In tandem with this overall growth trajectory, the total number of cards, both credit and debit, stood at 11.5 million in December 2013 compared to 10.7 million in December 2012.