What Is Credit Card Encryption?

Credit Card Encryption Explained in Less Than 5 Minutes

Customer using credit card reader to pay at a plant shop
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Credit card encryption is the conversion of the sensitive information required for credit card transactions into an encoded form that is only decipherable by the payment processor using the corresponding decryption key.

Learn more about what credit card encryption is, how it works, and how it protects credit card users from fraud.

Definition and Example of Credit Card Encryption

Most credit cards are equipped with a chip that is embedded within a silver emblem placed somewhere on the card. When a card with one of these chips is used for a purchase, it generates a cryptogram unique to that specific transaction to transmit the necessary information to the credit card processor.

When you use your credit card at a merchant, the payment terminal needs to transmit identifying information about your card to the payment processor in order to process the transaction. This information, of course, needs to be protected from unauthorized access.

How Credit Card Encryption Works

When you insert your credit or debit card into a chip reader machine while making a purchase, the cryptogram generated inside the chip is sent to the credit card processor so it can validate the purchase and authorize the transaction by using a decryption key to decipher the cryptogram. In this way, the credit card transaction is encrypted.

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

Since each transaction is associated with a particular cryptogram, encryption effectively prevents chip cards from being duplicated and used fraudulently. This is one of the main reasons why credit card issuers have moved toward chip cards over the last few years.

After you use your credit card at one merchant and use it at a different merchant, you usually insert it into the chip reader at the payment terminal once again. If you had swiped your card to have the magnetic strip read by the machine, your card would be giving the same information as it did in any previous transactions. This means that you have a higher probability of having your card information stolen.

When you insert your card into the chip reader, the information is once again encrypted, this time with a new code, so that the transaction can be securely processed. 

The information regarding your card is still transmitted, but it is done with less risk of having your card information stolen. 

Credit Card Encryption vs. Magnetic Stripes

 Encryption  Magnetic Stripes
Uploads encrypted card information Uploads the same card information
Provides different data each time Provides static storage for credit card data
Harder for thieves to intercept card information Easier for thieves to copy account data
More secure  Less secure

Magnetic stripes used to be the standard for credit card transactions, but this approach has fallen out of favor in recent years as the market has moved to EMV transactions, which use a chip capable of encryption instead of the older stripe.

These older credit cards with magnetic stripes simply upload the same card information to the payment terminal each time they are used without any accompanying one-time-use cryptogram.  The data stored in the magnetic stripe includes the credit card number, expiration date, and security code.

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

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

While magnetic stripes are still somewhat common in the U.S., they appear to be on their way out.  MasterCard, for instance, is planning to phase out most new stripes by 2024 and completely remove them from its cards by 2033.

Credit Card Encryption vs. Authentication

Encryption   Authentication
Secures card information as it is transmitted to payment processors Verification that user is authorized to use card 

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

While encryption has to do with securing card information as it is transmitted to payment processors, credit card authentication has to do with verifying that the individual presenting a card for payment is the actual cardholder.

Pros and Cons of Credit Card Encryption

Pros
    • Reduces fraud
    • Paves the way for future payment technologies
Cons
    • May cause transactions to take more time
    • Forces merchants to upgrade their payment terminal

Pros Explained

  • Reduces fraud: Credit card encryption establishes a unique, one-time code for each transaction—rather than the credit card number itself—that is transmitted to the credit card processor for decryption. This significantly reduces the likelihood of a criminal being able to steal a cardholder’s credit card information.
  • Paves the way for future payment technologies: While credit card encryption is currently done primarily through physically inserting a chip card into an EMV-enabled terminal, credit card encryption is increasingly being applied to other payment technologies such as contactless payments and tokenization.

Cons Explained

  • May cause credit card transactions to take more time: The encryption process, which involves the creation of a cryptogram unique to the transaction, may result in chip card transactions taking longer than static magnetic stripe credit card transactions.
  • Forces merchants to upgrade their payment terminal: Merchants will need to obtain payment terminals capable of reading EMV chip cards in order to process chip card transactions. However, some merchant service providers are providing free chip card terminals to new customers.

Key Takeaways

  • Credit card encryption is the process of making a customer’s credit card data unreadable except to the credit card processor.  
  • Encryption reduces the likelihood of a criminal being able to obtain the customer’s sensitive credit card information.
  • Credit card encryption involves the chip in an EMV card generating a one-time code associated with the current transaction, which is then transmitted to and deciphered by the credit card processor to complete the transaction.
  • While credit cards in the U.S. used to contain magnetic stripes that simply stored card data, these magnetic stripe credit cards are increasingly being replaced by EMV chip cards that encrypt card data on a transaction-by-transaction basis.