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Needled by PINs: Why bankers think you're dumb

by Peter Andrew

Do bankers think we're stupid? You can see why they might. For decades, we stood back and watched as they extracted huge wealth from the economy through rip-offs and exotic financial instruments that even they didn't fully understand. We allowed them to argue for -- and achieve -- greater and greater deregulation, and barely raised an eyebrow when, through lobbying and campaign contributions, they bought and paid for successive congresses. (Referring to Capitol Hill, Sen. Dick Durbin, D-Ill., once observed that bankers "frankly own the place.") Then we, the public, bailed them out to the tune of anything between several hundred billion dollars (through TARP) and $29 trillion, the latter sum calculated by academics at the University of Missouri-Kansas City.

Yep, if you occupied a corner office suite in one of Wall Street's better buildings, you might well believe that Americans are dumb. However, until now, it would have been career suicide for you to have said so out loud, at least in public.

Signing away our security

But today bankers are strongly implying that we're too stupid even to remember the four-digit personal identification numbers (PINs) that would allow us to significantly reduce debit and credit card fraud, with most insisting that insecure signatures are retained when a much safer alternative is available. This has all come about through the introduction within the U.S. of EMV (Europay, MasterCard and Visa), which is the technology that should soon see every American payment card come with an on-board microprocessor chip. Unlike existing magnetic stripes, these chips use sophisticated encryption to store the card's information, which makes them incredibly secure, and virtually impossible to clone. At least part of the reason the U.S. is global leader in payment card fraud must surely be because it's the last nation -- though only narrowly beaten by North Korea -- to adopt EMV.

But cloned cards aren't the only fraud risk posed at points of sale: using signatures to authorize payments is also inherently vulnerable to criminal activity. To start with, the card itself carries an exemplar of the signature, allowing thieves to practice copying it in private. Secondly, the tiny space allowed for signatures makes it hard both for the rightful owner to sign it recognizably, and for clerks to check it. And, thirdly, many clerks just don't bother verifying the signature at all.

Pinning down benefits

Small wonder it's almost universally acknowledged that entering a four-digit PIN into a payment terminal keypad is a much more secure way to authenticate a payment. Countless studies comparing plastic fraud in countries with PINs and signatures seem conclusive. Meanwhile, the 2012 Payments Fraud Survey, sponsored by the Federal Reserve Banks of Boston, Dallas, Minneapolis and Richmond, along with Independent Community Bankers of America, asked financial institutions themselves about authentication. A whopping 91 percent of bankers polled said PINs were better, making it the top choice.

And many retailers agree, which is why they are pressing credit card companies to adopt chip-and-PIN instead of chip-and-signature for America's roll-out of EMV.

"Easy-to-forge signatures are a virtually worthless form of authentication," Mallory Duncan, National Retail Federation (NRF) senior vice president and general counsel, said March 7. "Insisting on chip-and-signature cards is like installing an alarm on the front door of a home while leaving the back door wide open. It doesn't make sense when the technology exists to secure the entire house."

Why are we talking about this?

So if bankers and retailers are largely agreed on the superiority of PINs, why does it seem so likely that chip-and-signature is going to dominate? There seem to be two main reasons:

  1. Some bankers argue (in a recent theverge.com article) that American consumers are going to push back -- though they don't specify exactly how -- if EMV payments aren't quick and convenient. But it's debatable whether keying in four digits takes longer than signing. And convenience comes back to the assumption that we as a nation are uniquely unable to recall PINs. In western Europe, 85 percent of card transactions are PIN-enabled, and in countries such as Canada, France and the UK, there's little choice, with exceptions generally made only for tourists and residents with special needs.
  2. Currently, only one in four retailers have keypads at their points of sale, and there's a cost in adding these. However, if PINs are going to be mandatory for even a few credit cards, this seems to be an unavoidable price businesses are going to have to pay. And, given that they're already having to install new EMV-compliant terminals, it's likely to be a minor one. In any event, the NRF is supportive of chip-and-PIN.

Some suggest that chip-and-signature is going to be a mere stepping stone en route to an eventual full-PIN solution. But what's the point of that? Unless, that is, you believe that we, unlike so many other peoples, are too dumb to cope with four-digit numbers. There again, maybe Wall Street has 29 trillion reasons to think that's the case.

Published 04/14/14 (Modified 05/01/14)


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