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Cashing in on Credit Card Insecurity

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At least 70% of credit cards in the US will have their magstripes replaced with safer microchips by 2015. Savvy investors should place their money on the companies that stand to benefit from the move.

This article is published with permission from InvestmentU.com.

It’s been more than 4 decades since magnetic strips first debuted on the back of our credit cards, but, thanks to technology, it may be time for “magstripes” to go the way of the dinosaur.

According to a study by the Aite Group, by 2015 at least 70% of credit cards in the US will see their magstripes replaced by a safer, more secure microchip. The reason? The traditional US payment system is changing over to the Europay MasterCard Visa (EMV) system.

Chip and personal identification (PIN) systems are believed to be safer than magstripe cards, since they can be paired with a 4-digit personal security number.

It’s a huge undertaking, especially when you consider the numbers. Over two-thirds of Americans use credit cards, and the average American owns at least 4 of them. And yet, many countries already use these “chip and PIN” strategies, leaving the US behind its European counterparts.

Upgrading POS systems will cost a pretty penny (estimates are in the range of several billion dollars), but the benefits are well worth it—especially for investors. Here are a few companies you should get to know a little better before they take over the plastic in your wallet.

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Why it matters

During the Christmas shopping season in December 2013, more than 40 million holiday shoppers at Target had their personal info swiped directly from their cards’ magstripes.

Such a scam on a chip and PIN system would be impossible, thanks to the technologically complex—yet deceivingly simple—transaction process. Even if scammers manage to copy the card info, they still need the pin to complete the transaction.

“The chips in the newer E.M.V. cards—which encode account information when transferring it to the merchant—are harder to duplicate,” says New York Times writer J.D. Biersdorf. “And the PIN must be entered for each charge, which helps make the cards more secure for in-person purchases.”

And that’s good, especially with credit fraud on the rise. (The credit card fraud rate in the US grew by 17% between January 2011 and September 2013.)

Who’s leading the card charge

In anticipation of impending federal mandates, some big-name US firms have already made the move to EMV-compatible systems, including Citigroup Inc. (NYSE: C), JPMorgan Chase & Co. (NYSE: JPM), and American Express Company (NYSE: AXP).

Though the laws won’t kick in until 2015, they provide a powerful incentive for companies to make the switch.

“Under these rules, the bank or the merchant could be held accountable for any fraudulent charges if one of them has not upgraded to the new system,” Biersdorf says.

While that’s well and good, investors should place their dollars on the beneficiaries of the actual upgrade costs—the point-of-sale system companies that will provide the infrastructure for chip and PIN systems.

One power player is Gemalto (OTC: GTOMY), which maintains 10,000 employees across 43 countries and already provides chip and PIN services for many others. And it has already supplied more than a billion EMV cards worldwide.

“EMV has long been the gold standard in payment security in over 120 countries, and the October 2015 liability shift has the US market poised to embrace the convenience and security benefits of EMV technology,” a company release reads.

Since incorporating in 2002, the Netherlands-based company has been able to boost revenue year-over-year from 2.2 billion euros to 2.4 billion euros, with a current 52-week high of 91.15 euros.

Gemalto will also be joined by global payment mediator VeriFone Systems Inc. (NYSE: PAY). The company recently beat out Q2 earnings estimates by $0.06. Its revenues, meanwhile, increased 8.6% year over year for a total of $466.8 million.

There may also be a struggle for market control forming with NCR Corp. (NYSE: NCR), the world’s largest maker of self-checkout, point-of-sale systems (which amount to 33,000 units). This could offer merchants another option for expanding to handle EMV payments.

While the nation’s move to EMV systems should be a boon for all 3, the roles of each—and how best to align your investment—should become clearer as 2015 draws closer.

The information contained in this article should not be construed as investment advice or as a solicitation to buy or sell any stock. Nothing published by Physician’s Money Digest should be considered personalized investment advice. Physician’s Money Digest, its writers and editors, and Intellisphere LLC and its employees are not responsible for errors and/or omissions.


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