The banking and retail industries are preparing to crack down on fraud.

A rapid rise in the misuse of cards has prompted businesses to start phasing out the old-style plastic cards with a magnetic strip for new smart cards.

Smart cards have a microchip implanted in them and are more difficult for criminals to duplicate. The cards should be in widespread use by the end of 2004.

Home Office minister John Denham is backing the moves to stop fraud.

By moving away from magnetic stripe cards to cards with a chip and personal identity numbers (PINs) at points of sale across the UK, the industry claims it will be able to combat both counterfeit fraud and forged cardholder's signatures.

The new system, already operational in France, is not only more safe but, according to the British Retail Consortium, shows that PIN at the point of sale is quicker than signature verification by about two seconds.

The commitments depend on the successful outcome of the current round of discussions between banks and merchants. Fraud is the most serious issue being faced by the plastic card industry.

The latest research from the Association for Payment Clearing Services showed:

Last year, the plastic card industry lost almost £300 million to fraud, the equivalent of 7p on an average consumer transaction of £50.

Industry losses are running at £1 million a day
It is estimated payment card fraud will grow to £600 million by 2005 unless action is taken to combat the crime.

Mr Denham said: "The UK has been leading the world in creating a global standard for chip card design that guarantees high levels of security whenever consumers use their cards.

"It is vital we use this technology to combat the fraudsters, who find it all too easy to forge genuine cardholders' signatures and use the card as if it were their own.

The projected growth in credit card fraud to £600 million is a clear signal the industry cannot afford to delay.

"It is also right, where commercial activities create opportunities for crime, business should faces up to its responsibility to tackle the crime. It is important individual negotiations between banks and retailers are concluded in time to ensure implementation can take place by the end of 2004.

"In the meantime, the Government will be discussing with the industry and police how best we can work together to tackle the organised criminal gangs who are carrying out the fraud."

Implementation of the smart card scheme across the UK will cost £1.1 billion.

Peter Cox, chief executive of Lewes-based ID Data, which manufactures smart cards, said the company now supplied 30 per cent of the UK market, working with Barclays and Lloyds TSB and supplying loyalty cards to Tesco, Airmiles and Safeway.

He said: "The global market is continuing to expand at an estimated annual rate of 30 per cent."