The supermarket chain will implement the new system at 8,000 tills in its 500 UK stores by the end of the year to reduce fraud and cut costs.
The Association for Payment Clearing Services (Apacs) estimated that fraud with the existing magnetic strip and signature cards hit £411m last year with fraud rates rising at 30% a year.
In a move to cut these levels of fraud, the banks, Apacs and the British Retail Consortium agreed a 2005 deadline for all in-store credit and debit card transactions to be authorised by a customer keying in a personal identification number. The technology has been available elsewhere in Europe for several years.
Colin Grannell, managing director of Visa UK, said: "Visa member banks [in the UK] have already issued more than 20 million chip cards, and we estimate that at least 80% of payment cards will be both chip and PIN-based by mid-2004."
Safeway will work with IBM Global Services to implement EMV (Europay, Mastercard, Visa) chip card technology, which is already widely used across Europe.
"Safeway recognised that there was a solution that would work and saw the many advantages of implementing it sooner rather than later," said Ric Francis, chief information officer at the supermarket chain.
In addition to reducing fraud, the system will create savings by reducing the amount of administration needed at the point of sale by removing the need for store signed copies of receipts.
The increased level of security that smart cards bring also means that the potential exists for retailers to expand the use of unattended and self-scanning payment terminals.
In a related announcement, IBM Global Services is to offer asset monitoring and security-identity services based on chip cards and "smart chips" that send out radio signals.
The services will help companies remotely monitor the condition of fixed assets, such as pipelines and also track goods in transit.
John Kirby, vice-president of Global Wireless e-Business services at IBM Global Services, said: "Smart chips have been around for some time, but in the past six months demand has ramped up significantly."