The chip-and-pin system cut plastic card fraud by 13% in 2005, according to the Association of Payment Clearing Services (Apacs).
Losses due to the fraudulent use of credit and debit cards fell last year by £65m to £439m.
Most categories of fraudulent card use dropped, except for transactions over the phone, internet or by mail.
Chip-and-pin cards were introduced in 2004, with their use becoming required in shops from February this year.
The new type of card appears to have brought a decisive turnaround with fraud levels now back to the levels last seen in 2003.
In 2004, as the new cards were being introduced, card fraud continued to shoot up, by 20%, costing banks and retailers more than half a billion pounds.
Sandra Quinn of Apacs hailed the impact of chip-and-pin, which has been rolled out to most of the UK retailing and banking industries since October 2003:
"Seeing card fraud losses come down is cast-iron proof that chip-and-pin is doing its job.
"Back in 2002 we forecast that fraud would have risen to £800m in 2005 if we didn't make the move to chip-and-pin so it's heartening to see total losses well beneath this figure" she said.
Chip-and-pin cards require people to enter a four-digit number into a terminal at the point of sale, rather than relying on a signature which can be forged to authorise a purchase.
The new cards were first tested in Northampton in 2003, although that was ten years after they had been successfully introduced in France.
Since 2003, the use of the Pin numbers has become increasingly widespread.
Last month banks and retailers started to tighten up the system by curtailing the ability of people to continue signing for purchases if they have forgotten their pin numbers, or if they have never memorised them in the first place.
The biggest drop in card fraud last year was where they had been stolen or lost in the post before reaching their legitimate owner.
That dropped by 45% to just £73m.
This was partly because the new cards, which are harder for thieves to use, have now replaced the older versions.
Apacs also acknowledged that fraud using cards stolen in the post has dropped because the surge of new cards being sent out has passed.
Other types of card fraud also saw significant reductions.
The use of cloned or skimmed cards was down 25% and the use of those lost by, or stolen from, their rightful owner fell by 22%.
However fraud where the card was not present, such as for phone or internet purchases, continued to rise and was up by 21% at £151m.
The banking industry is now trying to develop technology to rein this in, for example by devising small handheld card readers which will let people tap in their Pin numbers to verify phone or internet transactions.