Urgency of adding more security measures to payment cards
When magnetic stripe cards were first introduced years ago, they were considered a relatively safe and convenient way of handling transactions. But as time passed, more and more techniques were developed that non-authorized people would use to commit various types fraudulent activity on them. Magnetic stripe cards are very limited in terms of the security measures that can be implemented to protect them from such activity. The attacks have now become so prevalent in recent years (especially in the U.S.), that it was imperative that a new type of payment card system be developed and implemented as soon as possible.
New technologies made available for adding such security measures
Luckily, at around the same time period, new advanced integrated circuit technologies were developed that would allow IC chips to operate at extremely low power levels, while providing much more processing capabilities in a smaller space. Likewise, the costs of manufacturing and specialized integrated circuit chips on a mass production level have dramatically decreased.
Utilizing the processing power within payment cards
So it became obvious that a specialized IC chip designed for payment card usage be developed on a large scale to replace the magnetic stripes that were used to handle transactions for so many years. Unlike the static unchanging cardholder and application data found on a magnetic stripe, the chips processor can generate its own “Dynamic” data that changes for each individual transaction using cryptographic techniques. Since the card data would be unique for each transaction, a thief wouldn't be able to do anything with it if this data was somehow stolen or intercepted during a transaction. This makes it virtually impossible to create a counterfeit form of the card.
Processor on a chip card allows for many additional security measures
By generating “Dynamic data”, an EMV chip card can be verified as authentic (e.g. not a counterfeit) every time it is used for a transaction. In addition, the integrity of the cardholder and sensitive application data on a card can be checked to verify that it is original and hasn't been modified since it was issued.
By using the chip's processing capability, certain “terminal risk management” parameters (such as spending limit) can also be checked whenever the card is used to determine whether the transaction should be disallowed or should go online for further analysis. This can prevent a lost or stolen card from being used in certain instances.
Although such attacks can easily be prevented by using a cardholder verification method (CVM), such as online or offline PIN codes that chip cards sometimes require to verify identity. However, many cards still use the signature CVM, and possibly no CVM at all (for card not present (CNP) transactions). So a thief would still be able to use a lost or stolen card in such cases.
However, there is another method in development which would almost guarantee the identity of the cardholder, either online or offline. An alpha-numeric display and keypad would be embedded in the plastic card, so customers would type their PIN into the card whenever they make a POS or CNP (online) transaction. Cryptographic techniques are then used to create a single-use code that is sent to the website or terminal. This would prevent a thief from intercepting the PIN and card data for malicious use.
The use of multiple applications on one card as a driving factor
The other major driving factor to motivate the process to shift over to EMV chip card technology, is each card would have multiple application functioning capability. Unlike magnetic stripe cards, the processor on a chip card would allow several different types of applications to be stored and processed on one card. An example would be having a debit application for use at ATMs and a credit application for use at a POS terminal on the same card. In this way, a consumer wouldn't have to carry several cards, one for each application.
Other benefits in using an embedded chip processor on a card
Many other benefits become apparent as chip cards are used instead of traditional magnetic stripe cards, such the ability to update the cards with new information as necessary, longer life span (the magnetic stripe tend to wear out), and the ability to perform contactless transactions, which are becoming popular with the latest smart-phones.