Retailers who fail to modernise will become liable for credit card fraud when a new payment system is introduced next year.

Chip and Pin will replace signatures with a four-digit personal identification number.

Customers will type their PIN into a number pad and the system will check it against the number on their card's microchip.

It has been described as hacker- proof and businesses which fail to subscribe to it will be forced to compensate the card owner.

The change has led to fears that shops which fail to update their systems will be targeted by credit card thieves.

Trevor Freeman, of the Brighton and Hove branch of the Federation of Small Businesses, said banks should not pass installation costs on to shopkeepers.

He said: "We accept the banks have paid for the technology to create these new payment systems but they also stand to gain most from them.

"Credit cards have caused small businesses a headache and they will end up paying more, in real terms, for these new systems.

"We are advising our members to look at Chip and PIN because we don't think they should be liable for costs. At the same time we don't think they should have to pay to upgrade."

John Davies, head of business law at the Association of Chartered Certified Accountants, said: "It is vital all businesses which accept credit and debit cards understand the implications of this liability shift.

"Those retailers who choose not to adopt the Chip and PIN system will be held responsible and, as a result, are likely to become the focus of attention of credit card fraudsters."

Payments made using a credit or debit card where the cardholder is not present - over the telephone for example - will be exempt from the liability shift.

Chip and PIN is being called the biggest change in the way we pay since decimalisation in 1971.

The Government is desperate to improve security for card transactions. In 2002 more than £424 million was spent on stolen credit cards.

In France a similar payment scheme using PINs has led to an 80 per cent drop in credit card fraud.

Chip and PIN is expected to lead to a 60 per cent drop in card fraud in this country.

Mr Davies added: "Many businesses will need to act swiftly to ensure updated and compliant point of sale equipment is installed and their staff adequately trained."

Tuesday March 30, 2004