A helpful comment from "Paul C" posted on krebsonsecurity.com:

"Speaking as a developer with 9 years of POS application experience, and 8 years POS support experience at a major OEM who’s hardware isn’t in Target stores anymore …

re: end to end encryption
There’s a financial difference to the retailer between authorising a transaction with a card #, name and expiry date and authorising one where the retailer has the full track info. The card processor historically charges the retailer a smaller %age of the transaction total if they can supply the full track info, since that implies the retailer physically saw the card and so cuts down on ‘card not present’ fraud. Ironic, isn’t it?

Historically the pinpad has given the unencrypted data to the POS terminal, where the application is responsible for authorising the card (either over dial up line or internet connection) with the card processor. Note that the POS application typically does not do this itself – it hands it off to a dedicated application on the POS terminal to do that. So in this case we’ve already got unencrypted data going from the pinpad to the POS application to the processing application. Whether the processing application encrypts the data is between it and the bank, but most of the ones I’m aware of don’t (or at least didn’t when I dealt with them).
Now, modern pinpads have the abilty to authorise themselves directly with the processor without even giving the card info to the POS terminal, but that then requires a pinpad have internet access, with all the headaches that entails …

re: storing of card numbers by retailers
Consumers are lazy. We like being able to return a gift without a receipt, and have the retailer look up the transaction based on the card we used to make the purchase.
We also like being able to log in to our favourite website and make a purchase, billing it to the card we used last time. In both cases the retailer has to store the card # & expiry date in order to make this work.
Sure, the retailer can not do this, but how many customers are they likely to lose to the store next door which does offer this functionality? It’s only when something goes wrong that we start complaining about it.

re: writing “Check ID” on the signature line of the card
The signature on a credit card is not to prove you are the cardholder, it’s to say you agree to the terms and conditions of the card. If the card isn’t signed then the retailer has no way to know that once they give you the goods you will actually pay the card company – obviously you can still not do that (hence all the people in credit card debt), but there’s a difference between not paying the card company when you are legally obligated to, and not even having the obligation. In the first the card company will come after you for lack of payment, in the second the retailer is effectively giving you the product with no recourse to anyone if you don’t pay.
The reason most people get away with it is because (a) most people don’t know the rules and (b) most store managers and cashiers don’t want to be the one to enforce it.
See http://usa.visa.com/merchants/risk_management/card_present.h... for more details.

The retailer could quite easily mandate to their staff that all card purchases in store require a check of photo ID, but that takes longer (who wants their checkout time to take even longer?) and puts the onus on the cashier to verify the identity (and the retailer probably wouldn’t want that either)."