What Is Credit Card Encryption & How Does It Work?

As someone always looking for ways to reduce fraud on my website, I’ve learned a lot about encryption. Most cards today use it, but understanding how it works is key. Without this knowledge, your business could face chargebacks.

I’ll explain what credit card encryption is, how it works, and what else you need to know.

Here’s what card encryption is.

Key Takeaways

• It converts card data into unreadable code.
• EMV adoption now covers 94.76% of global card-present transactions.
• It doesn’t prevent friendly fraud disputes.
• EMV liability shift holds non-compliant merchants accountable for chargebacks.
• NFC transactions aren’t encrypted.
• EMV compliance has reduced counterfeit fraud by 87% for some merchants.

While encryption is great for preventing fraud, it doesn’t stop chargebacks from friendly fraud or merchant errors. What can you do with those disputes?

Chargeback alerts can help. They notify you when a shopper files a dispute. Such an alert allows you to resolve it before it turns into a chargeback.

Learn how they work.

What is Credit Card Encryption?

Credit card encryption turns sensitive payment data into unreadable code during transactions. Some of this data includes card numbers and expiration dates. A unique decryption key unlocks the data, keeping it safe — even if hackers intercept it.

For the most part. We'll explain that soon.

Chip-enabled EMV cards add another layer of security by generating a unique code for each transaction. Unlike magnetic stripes, which store unchanging data, chips encrypt payment details. This makes it harder for fraudsters to copy and/or use the information.

Encryption protects payment data from the moment it’s entered at the checkout until it reaches the payment processor or bank. This end-to-end process ensures sensitive information stays secure during its entire journey.

Online payments also use encryption, with standards like EMV SRC (Secure Remote Commerce). Such technology adds protection for e-commerce transactions.

You can read more about EMV SRC here.

Let’s break this down.

Glossary:

• EMV: Europay, Mastercard, and Visa — a global chip card standard.

Summary: Credit card encryption transforms sensitive data into secure, unreadable code.

How Does Credit Card Encryption Work?

During a credit card transaction, encryption protects payment data through these steps:

1. The customer inserts their EMV chip card into the terminal.
2. The card’s chip creates a unique cryptogram with dynamic data to secure the transaction.
3. The terminal encrypts the cryptogram and sends it to the payment processor.
4. The payment processor decrypts the data, verifies it, and authorizes the transaction.
5. If approved, the transaction processes. The funds move from the customer’s account to the seller.

Here’s an example of how this works:

Imagine you’re buying a coffee. When you insert your EMV card, the chip encrypts your payment details and creates a one-time-use cryptogram. The terminal sends this encrypted data to the payment processor, which decrypts and validates it.

Even if a hacker intercepts the data, it’s useless because the cryptogram works only for that transaction.

EMV chips offer dynamic encryption. They create unique cryptograms and iCVVs for every transaction, making intercepted data useless after it’s used.

Now compare this to magnetic stripe cards. These store static data that criminals can easily skim and clone. EMV encryption makes this tactic ineffective and keeps chip-based transactions much safer.

But EMV chips aren’t flawless.

Hackers can still use EMV bypass cloning to copy chip data onto a magnetic stripe card. We cover this topic in more detail in another article.

And what about contactless payments?

With over 50% of global in-person transactions now contactless, are they encrypted too? [1]

Glossary:

• CVV: Card Verification Value, a static or dynamic security code on the back of payment cards.
• Cryptogram: A dynamic, transaction-specific code generated by the EMV chip.
• EMV Bypass Cloning: A fraud method that exploits gaps in EMV implementation to clone data.

Are NFC & Contactless Transactions Secure?

Contactless NFC transactions don’t encrypt card data during transmission. Instead, they use other security measures to prevent intercepted data from being misused. Such measures could include dynamic cryptograms.

An attacker could eavesdrop and capture APDUs , but much of the captured data is useless. For example, the iCVV isn’t included, and the cryptogram is tied to just one transaction.

If you’re curious, I found this info in a forum post [2].

Now, back on track:

Because NFC lacks encryption, it’s more vulnerable than traditional chip-and-dip methods. Merchants and consumers should stay aware of these risks. They should use secure terminals and updated payment systems to reduce vulnerabilities.

It’s worth noting there are EMV-based NFC purchases and tokenization-based purchases. We’ll dive into their differences later.

Are there benefits to credit card encryption? Let’s explore that next.

Glossary:

• APDUs: Application Protocol Data Units, packets of data exchanged during NFC communication.
• NFC: Near-Field Communication, a short-range wireless technology.

Benefits of Credit Card Encryption

Here are the benefits of card encryption:

• Protects cardholder data from unauthorized access and fraud.
• Reduces counterfeit fraud with dynamic, transaction-specific cryptograms.
• Boosts customer trust by safeguarding payment details.
• Ensures compliance with security standards like PCI DSS and EMV requirements.
• Lowers chargeback rates linked to counterfeit fraud.
• Provides end-to-end security for in-person transactions.
• Reduces card cloning risks compared to magnetic stripes.
• Works seamlessly with modern payment terminals and processors.

When consumers know their data is secure, they feel more confident completing transactions. For merchants, this trust leads to repeat business and stronger customer loyalty.

Encryption ensures businesses meet security standards like PCI DSS and EMV. Non-compliance can result in hefty fines and reputational damage. Thus, investing in encryption is essential.

By Q4 2023, 94.76% of global card-present transactions used EMV chips. This highlights the widespread adoption of encryption. It also showcases its success in preventing fraud for businesses and consumers.

But how effective is it at reducing fraudulent chargebacks? Let’s find out.

Glossary:

• PCI DSS: Payment Card Industry Data Security Standard; rules ensuring secure card transactions.

How Does Credit Card Encryption Correlate With Chargebacks?

Credit card encryption is effective in reducing chargebacks caused by counterfeit card fraud. The EMV liability shift, introduced in October 2015, reinforced this connection.

Under this, merchants who don’t adopt EMV are responsible for certain fraud-related chargebacks. Chargeback reason codes for card-present fraud often reflect this liability.

True fraud chargebacks make up only 1% of all chargebacks, but they’re expensive. For every $1 lost to fraud, merchants spend $3.75 on related costs. These include chargeback fees, lost inventory, and operational expenses.

EMV encryption lowers these incidents.

Visa reported an 87% drop in counterfeit fraud losses among EMV-compliant sellers by March 2019, compared to September 2015 [3].

By September 2019, some merchants who used EMV upgrades saw an 87% reduction in counterfeit fraud for card-present purchases [4].

These numbers show EMV encryption’s effectiveness in preventing fraud.

However...

It’s important to distinguish between two types of chargebacks:

• True fraud: Unauthorized transactions by malicious actors.
• Friendly fraud: When a legitimate customer disputes a charge they made — sometimes accidentally.

Friendly fraud accounts for over 70% of chargebacks in some cases. And EMV encryption has little impact on friendly fraud. While it secures transactions and reduces true fraud, it doesn’t address disputes over legitimate purchases.

Encryption works well for card-present transactions. Though, merchants should see it as one part of a larger security strategy. Pairing encryption with tokenization for online payments builds a stronger security framework.

But are tokenization and encryption the same? Not quite. Let’s break it down.

Summary: Helps reduce in-person fraudulent chargebacks. Also gives the merchant more liability if they don’t use EMV terminals.

Tokenization vs. Encryption: What's the Difference?

Encryption turns sensitive data into unreadable code, which can only be unlocked with a unique decryption key. Tokenization replaces sensitive data with tokens. These are meaningless outside the system that created them.

Encryption is used more-so for card-present transactions. Tokenization is better suited for protecting stored data and online payments. Each method has its strengths. Though, they can work together depending on specific security needs.

Want to know more?

Check out our comparison of tokenization and encryption.

Now, if you want to encrypt payments, here’s how you’d do it.

Summary: Tokenization replaces data; encryption secures it with coded transformations.

How to Ensure Payments are Encrypted

Here are practical steps to ensure your payments are encrypted:

1. Use Up-to-Date EMV Terminals

Install EMV-compliant terminals to encrypt transactions at the point of sale. These terminals use the chip on credit cards to create dynamic cryptograms.

2. Choose EMV Over Swipe Terminals

If you use platforms like Square or Shopify, opt for EMV-compatible card readers instead of swipe-based devices. Magnetic stripe transactions are easier to skim and clone, while EMV offers stronger security.

3. Stay Current With EMV Updates

Update your payment systems and software to meet the latest EMV standards. Updated systems help prevent vulnerabilities that criminals could exploit.

4. Invest in Employee Training

Train employees on how to use EMV technology and emphasize the importance of chip-based payments. Mistakes, like forcing a swipe transaction when the chip doesn’t work, can compromise security.

And that’s it — these steps make encrypting transactions straightforward.

Now, let’s address some commonly asked questions to wrap things up.

FAQs

What Happens if a Chip Card is Swiped Instead?

Swiping bypasses EMV security, leaving the transaction vulnerable to fraud or skimming.

Wrapping Up

Credit card encryption has helped reduce in-person fraud and transformed how payments are made. However… It doesn’t prevent all chargebacks, like those caused by friendly fraud.

That’s where extra tools come in, like chargeback alerts. These alerts let you address disputes before they turn into chargebacks. Protecting your chargeback rate.

We provide these alerts. Schedule a demo today.

Sources

• [1] Tap to Pay on the Rise. CIO Dive. 9/16/2024.
• [2] Is EMV Encrypted? Stack Overflow.
• [3] Chip Cards Reduce Fraud. 9/04/2019.
• [4] EMV in the US. Thales. 2020.