“A what?” This just might be a common refrain from children a few years down the road in response to their parents discussing the good old days of magnetic stripe credit cards as if they were single-digit movie theater prices or some other relic of yesteryear. Indeed, the magnetic stripe credit card, common in the United States since the 1960s, might be on its way out. But this isn’t the first time the death knell has tolled for magstripe cards, so why should we believe it this time around?
Notable Replacement Efforts
American Express Blue Cash:
A number of attempts to replace the magnetic stripe card over security concerns have been made in the past – such as the American Express Blue Card, which was introduced in 1999 and marketed as a way to increase e-commerce security. By swiping the Blue Card through a reader attached to a computer and entering a code, users could unlock their virtual wallets and complete online orders without having to repeatedly enter payment or shipping information. So why did this technology fail?
For starters, the personal information that Blue Card technology stored and protected remained as vulnerable as ever once it was transmitted across the Web. Besides, the threat posed by online credit card fraud isn’t all that significant to consumers given the fact that most credit card companies have $0 liability guarantees, which protect users from unauthorized purchases. As a result, only six out of every 1,000 Blue card users applied the smartcard technology to the Web, according to a widely quoted study by Atlanta-based Brittain and Associates, and the technology did not take off as expected.
Next came the introduction of contactless smartcard technology, which allows payment information to be relayed to a contactless point of sale (POS) terminal through radio-frequency identification (RFID) when consumers wave their microchip-embedded cards over it. By 2005 American Express (expresspay), Visa (payWave) and MasterCard (PayPass) all made contactless-payment products available to issuing banks, but the technology was relatively slow in taking off for three reasons:
- Security concerns kept many consumers away
RFID-enabled cards do not require a personal identification number (PIN) for payment authorization, and a signature isn’t typically needed for payments below $25. According to a survey commissioned by the Smart Card Alliance, 61% of respondents who were unwilling to use contactless forms of payment cited concerns about the technology’s safety as their primary justification. 51% of users and potential users also claimed security to be their main concern with the technology.
- The infrastructure needed to support the introduction of contactless smartcard technology simply was not there early on
As of 2006 less than 1% of the merchant locations in the United States were enabled to accept contactless payments, according to the Smart Card Alliance, and though this number has since grown to about 3%, the technology never became that practically relevant.
- Costs outweigh benefits for credit card companies
Consumers simply did not care enough about having RFID-enabled cards to warrant the investment by credit card companies to roll out the feature across all of their cards.
The same could not be said for smartcards in Europe, as the technology has flourished since Visa, MasterCard and Europay joined together in 1993 to develop international standards for chip-based smartcards in order to foster international operability. The standards developed through this partnership, known as EMVCo, have been widely adopted, except in the U.S., and have led European banks to convert their cards to the chip-and-pin system in 2005. Chip-and-pin cards come embedded with microchips, which allow specialized card readers to verify a card’s authenticity, and have corresponding 4-digit PINs, which card holders use to prevent identity theft.
A growing concern over the fraud risk posed by magnetic stripe credit cards also recently led the European Payments Council to pass a resolution that allows for the restriction of magnetic stripe credit card use on the continent. While most foreign banks have yet to exercise their freedom to accept only chip-and-pin transactions, many believe their ability to do so could cause problems for tourists from both sides of the Atlantic. However, this is not the primary reason for the demise of the magnetic stripe credit card.
Take 2 in the U.S.
Smartcard technology is now gaining a great deal of momentum in the U.S., with the implementation of Near Field Communication (NFC). NFC is a subset of RFID that lowers the range of communication between device and receiver from a few meters to 4 inches, thereby drastically improving the security of transactions. However, technology improvements and the resulting diminishment in security concerns aren’t the only things that differentiate this from other attempts to bump off the magstripe card.
Another key factor is the backing NFC technology has received from mega-companies like Goggle and Apple:
- Google Wallet already uses NFC technology to turn compatible smartphones into means of payment and saving, as a user can sync a Citi MasterCard or Google Prepaid Card and simultaneously pay for goods and take advantage of Google Offers. A PIN is also required to access your Google Wallet, helping to further alleviate the security concerns over previous attempts at contactless payment implementation.
- Apple reportedly plans to equip future iPhones with NFC chips, though reports have it that the technology will not be part of the soon-to-be released iPhone 5.
So what does this all mean? Well, as NFC technology becomes standard fare on smartphones, its popularity should grow exponentially. Increasing the security of contactless payment technology – already a simple and fast payment alternative – and attaching it to products that consumers use everyday and to companies they trust will help smartcard technology in America clear the user adoption hurdle other efforts have faced.
NFC technology also allows users to leave their cards at home if they wish. Previous attempts at smartcard implementation involved simply adding RFID chips to existing magnetic stripe credit cards and giving consumers the option of contactless payments. People inevitably ended up swiping their cards as they always had. Now, if they want to use their phones as methods of payment, they must use NFC technology.
Last but not least, NFC’s applicability to areas beyond the payments industry – using one’s phone as an electronic boarding pass or to swap business cards with a new acquaintance, for example – should also increase user familiarity and comfort with the technology, thereby lowering barriers to its universal adoption in the credit card space. We can expect this adoption to occur relatively quickly as well, given the prediction by Juniper Research that global NFC mobile contactless payment transactions will reach almost $50 billion by 2014.
[Disclosure: Some of the links within this article point to CardHub.com, which is owned by the same parent company as Wallet Blog.]