What is credit card encryption?

Definition and Example of Encryption

How does credit card encryption work?

Credit Card Encryption vs. Magnetic Stripes

Credit Card Encryption vs. Authentication

Advantages and Disadvantages of Credit Card Encryption

Definition and Example of Encryption

Credit card encryption is the process of converting sensitive information required for credit card transactions into an encrypted form that can only be decrypted by the payment processor using the corresponding decryption key.

Credit card encryption is the process of making credit card data unreadable to anyone other than the card processor. Encryption reduces the likelihood that a perpetrator can obtain sensitive customer credit card information.

Credit card encryption involves a chip in the EMV card that generates a one-time code associated with the current transaction, which is then sent to the credit card processor for decryption and transaction completion.

How does credit card encryption work?

When you insert your credit or debit card into a chip reader during a purchase, the encrypted code generated inside the chip is sent to the credit card processor to verify the purchase and approve the transaction using the decryption key to decrypt the code. In this way, a credit card transaction is encrypted.

Europay, MasterCard, and Visa developed this technology, so chip cards are sometimes referred to as EMV chip cards.

Since each transaction is linked to a specific code, encryption effectively prevents the cloning of chip cards and their illegal use. This is one of the main reasons that credit card issuing companies have moved towards using chip cards in recent years.

After using your credit card at one merchant and using it at another, you typically reinsert it into the chip reader at the point of sale. If you pulled your card for the magnetic stripe to be read by the device, your card would provide the same information as it did in any previous transactions. This means you have a higher risk of your card information being stolen.

When you insert your card into the chip reader, the information is encrypted again, this time with a new code, so it can process the transaction securely. Your card information is transmitted, but with lower risks of your card information being stolen.

Credit Card Encryption vs. Magnetic Stripes

Encryption Magnetic Stripes

Magnetic credit cards used to be the standard in credit card transactions, but this approach has become obsolete in recent years as the market shifted to EMV transactions, which utilize a chip capable of encryption instead of the old magnetic stripe.

Old magnetic credit cards simply carry the same card information to the point of sale every time they are used without any one-time code for use. The data stored in the magnetic stripe includes the credit card number, expiration date, and security code.

When the magnetic stripe is swiped at the point of sale, the card simply provides a static storage of this data that the device reads when processing the transaction. This makes it relatively easy for third parties to copy account information onto another card.

Although chip cards still often come with the old magnetic stripe, swiping your card is less secure than using an EMV chip.

Credit Card Encryption vs. Authentication

Encryption Authentication

Credit card encryption is not the only security procedure used to prevent fraud in credit card transactions.

While encryption is concerned with securing card information during its transmission to payment processors, credit card authentication is about verifying that the person presenting the card for payment is the actual cardholder.

Advantages and Disadvantages of Credit Card Encryption

Advantages

Reduces

Fraud protection: Credit card encryption creates a unique, one-time code for each transaction – instead of the actual credit card number – which is sent to the credit card processor for decryption. This significantly reduces the likelihood of credit card information theft from the cardholder.

Paving the way for future payment technologies: While credit card encryption is currently primarily done through inserting a chip card into an EMV-compatible reader, it is increasingly being applied to other payment technologies such as wireless payment and tokenization.

Disadvantages

May cause transactions to take longer: The encryption process, which involves generating a unique transaction code, can lead to longer transaction times for chip cards compared to fixed magnetic stripe card transactions.

Forces merchants to upgrade their payment devices: Merchants will need to acquire EMV chip card capable payment devices to process chip card transactions. However, some e-commerce service providers offer free chip card payment devices for new customers.

Source: https://www.thebalancemoney.com/what-is-credit-card-encryption-5207512