Payment protection, but for who?

It has been hailed as the biggest change for shoppers and businesses since decimalisation and aims to eliminate more than half of all credit card fraud. But the introduction of chip and pin technology at tills across Britain has been far from smooth for businesses.

The motives behind the introduction of the new system are hard to argue with. Card fraud reached a record high of £424m in 2002. Of this amount, counterfeiting accounted for £148m, followed by "card not present" fraud at £110m and use of lost and stolen cards at £108m. Much of the money obtained from card fraud is used to fund other crimes such as drug trafficking, illegal immigration and terrorism. A similar domestic pin-based system for debit cards only in France has seen an 80% reduction in fraud since its introduction ten years ago.

It is hoped the chip and pin programme, which was launched by the retail and banking industries with the support of the home office, will tackle more than 60% of fraud. It is estimated that if chip and pin was not put into action, fraud would grow to more than £800m by 2005. If this was allowed to happen, the survival of the card payments system itself could be in jeopardy.

There are two elements involved in making a plastic card transaction secure: ensuring that the card is genuine and that the person presenting the card is the true owner. Chip does the former and pin does the latter. The chip therefore protects against counterfeit fraud and the pin against lost and stolen cards and those intercepted in the post. All retailers who accept credit card payments had to upgrade to or install new terminals by January 1 this year. Failure to do this shifts the liability for fraud from the bank to the retailer.

The Forum of Private Business has heavily criticised the way the new system has been implemented. The transition was never going to be easy - 42 million people in the UK have at least one credit card - but the FPB said banks had an ulterior motive.

Chief executive Nick Goulding said: "The FPB has been deeply concerned for some time that chip and pin is being crowbarred in by the banks, which are desperate to transfer liability for fraud. Retailers must realise that if they accept signature payment rather than the pin, they will shoulder the cost of any fraud, not the banks."

The Association of Payment and Clearing Services (APACS) has addressed the confusion over who is now liable for fraud. Spokeswoman Sandra Quinn said: "Businesses that own their card-accepting and payment systems and have not yet installed the new technology are now liable for the cost of fraud committed on chip and pin cards at the point of sale that could have been prevented by using chip and pin technology. If those retailers do not own their equipment and lease it from the bank, who have not yet supplied it, then liability stays with the bank."

If you have a chip and pin terminal you are covered for the cost of card fraud - whether a customer enters their pin or their signature - provided that on-screen prompts and routine checks are followed to ensure cards have not already been reported lost or stolen. Banks will continue to be liable for the cost of card fraud committed on old style non-chip and pin cards, so by accepting them, no business is putting itself at risk in any way.

The chip and pin campaign - which will have an overall cost of £1.1bn split between banks and retailers - began the first phase of a national rollout in May 2003 with a three-month trial in Northampton. Almost 1,000 smaller retailers who lease their payment equipment from their banks took part. By the end more than 200,000 pin enabled credit and debit cards had been issued and around 1,000 outlets had taken part. The trial was deemed a success.

Federation of Small Business spokesman David Bishop is less than thrilled with the way the system has been implemented. He said: "It does appear that retailers are at the front line and are having to educate the popula tion as a whole, to drag the whole country into the age of chip and pin. We think that's unfair and we would like to see more support for small, independent retailers."

Despite the FSB's protestations, the banking industry points to the fact that in France, the Netherlands, New Zealand and Canada, people have been using secret, four-digit numbers rather than signatures for several years without any difficulties.

And shoppers in the UK don't seem to have a problem. More than 12m transactions over the new year bank holiday weekend were verified with a number. Tesco, the country's biggest supermarket chain, handled up to a million transactions a day using pins over the Christmas period. And where the big boys lead, everyone else is sure to follow.

Mission accomplished, according to Quinn at APACS: "We had two clear aims as part of the chip and pin programme which is to ensure that all the top 45 retailers (who all own their own till and card equipment) either have a programme in place to upgrade to chip and pin or have done so and to ensure that banks supply the card equipment to businesses and retailers who lease their equipment.

"What this accounts for is that the group of retailers/businesses often referred to as mid-tier (i.e. own two or three outlets and own their own equipment but are not in the top group which is where most of us use our cards) have to make their own business and investment decisions about upgrading to chip and pin.

"We've provided them with information about the long-term impacts and risks of not upgrading but have no power of persuasion over and above that. It can only ever be their decision whether to upgrade or not and hopefully a decision that they make in full possession of the facts. The good news is that 85% of retailers have already upgraded, and we expect even more to complete the rollout throughout 2005."