By Robin Sidel
EXTON, Pa.--Inside a one-story brick factory surrounded by a
locked chain fence, more than a thousand workers toil in a plant
that operates around the clock to help U.S. banks catch up to the
rest of the world in credit-card security.
The owner of the plant, Oberthur Technologies, is racing to meet
the banking industry's demand for new cards embedded with a
computer chip in addition to a traditional magnetic strip. The
goal: to reduce card fraud by making it harder for thieves to
create counterfeit cards.
Some 575 million of the new cards--representing about
three-quarters of U.S. credit cards and about 40% of debit
cards--are expected to be in the wallets of American consumers by
year-end, making it the biggest rollout of new cards in
decades.
Chip cards, which have been used throughout Europe, Asia and
Canada for years, are coming to the U.S. after delays from banks
that issue cards and the merchants who accept them.
But challenges remain: Even though tens of millions of new cards
have already been shipped to customers, only Wal-Mart Stores Inc.
and a few other large retailers so far have upgraded their payment
terminals to accept the new plastic. Target Corp., which had a
massive breach in late 2013, has upgraded its terminals and plans
to start accepting chip cards in the late spring, according to a
spokesman.
Many merchants are also griping that they won't meet an October
deadline, when the liability for fraudulent transactions will under
certain circumstances shift from card-issuing banks.
A trade group representing tens of thousands of grocers and
pharmacies last month asked Visa Inc., MasterCard Inc., American
Express Co. and Discover Financial Services to delay the October
deadline until 2016, citing backlogged orders for new equipment. It
also expressed concern about potential delays in the checkout line
during the holiday shopping season because consumers may be
confused about how to use the cards, which must be dipped into a
reader rather than swiped.
So far, the card networks haven't given any indication they will
delay the plan.
As an additional complication, some small banks are saying they
won't start issuing the more secure cards until next year at the
earliest.
"Some of [the small banks] are struggling with the complexity of
it, and the cost is a factor," said Jamie Topolski, director of
alternative payment strategies at Fiserv Inc., which is helping
small banks navigate the transition to chip cards.
The cards are as much as five times more expensive to make than
traditional cards, costing roughly $1 each. Even for small banks,
that could be an added expense of tens of millions of dollars, a
big tab at a time when they are being squeezed by low interest
rates and heightened regulatory requirements.
Card-issuing banks hope that the extra expense will be offset by
a decline in fraud costs.
"We want them, and we hope the benefits outweigh the costs,"
said Doug Gulling, chief financial officer of West Bancorp. Inc.,
which has $1.5 billion in assets. The Des Moines-based bank, which
operates 12 branches in Iowa and Minnesota, will start introducing
chips on its debit cards next year.
The new cards are considered more secure because the chip
creates a unique code for each transaction, making it more
difficult for thieves to replicate the cards with stolen data.
Traditional cards with a magnetic strip contain static data that
can be duplicated, including account numbers and expiration
dates.
Card manufacturers say that they are having a hard time
convincing some financial institutions that the cards take longer
to make than traditional cards, especially if designs need to be
altered to make room for the computer chip that is embedded on the
front.
"The large issuers are very sophisticated and have been working
on this for years, but there are some people that are just
scratching the surface," said Steve Montross, chief executive
officer of CPI Card Group, a manufacturer that shipped about 70
million chip cards to U.S. issuers last year.
Chip cards represent about 80% of the cards being made these
days at the Oberthur plant, which has a capacity to produce 20
million cards a month and is located about 30 miles west of
Philadelphia. The company bought the Exton plant in 1999 as part of
a plan to gear up for chip-cards production, thinking they were
around the corner.
"It took a very, very long time, and now it's happening on an
accelerated basis," said Martin Ferenczi, president of North
American operations for Paris-based Oberthur, a printing firm
founded in 19th-century Paris that has morphed into one of the
world's leading manufacturers of credit and debit cards.
The plant now employs 1,080 workers, up 68% since 2013, and it
recently shifted to round-the-clock operations.
Security at the plant is tight. Workers who move through
different sections of the facility must pass separately through
multiple sets of locked doors that can only be accessed
electronically with an identification card.
The plant was humming on a recent morning as nine rows of cages
filled with hundreds of thousands of half-finished credit and debit
cards waited for their chips.
The nation's largest financial institutions are ahead of smaller
banks in getting the new cards to their customers.
J.P. Morgan Chase & Co., the nation's largest credit-card
issuer, has issued more than 19 million chip cards so far and
expects to have more than 70% of its credit-card portfolio
converted by year-end, a spokesman said. The company has started
issuing debit cards with chips in Arizona and Illinois and will be
rolling them out nationally over the next few months.
Citigroup Inc. has issued more than 12 million chip cards in the
U.S., representing more than half of its portfolio. The big bank
plans to start issuing chip-enabled debit cards this year, a
spokeswoman said.
Write to Robin Sidel at robin.sidel@wsj.com
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