Credit or debit? Points or cash? High-tech cards overcome mag-stripe's limits
By Michelle Crouch
After more than 40 years of relying on the same basic magnetic stripe technology, the humble plastic credit card is about to get smart. From cards with buttons and displays on the front to those that can be programmed to keep you on a budget, a number of new innovations are in the works.
Europe moved to smarter, chip-enabled cards years ago, but the size of the magnetic stripe infrastructure in the U.S. has made that type of widespread change difficult, since millions of new card readers would be required. So in a new twist, some companies are now creating interactive cards that work with ordinary magnetic stripe readers.
Citi's new 2G card, for example, has a programmable magnetic stripe and buttons on the front that let customers choose before they swipe whether they want to pay with credit or reward points. And just this week, MasterCard Worldwide announced the U.S. release of a card with a tiny LCD screen that will display a one-time passcode, designed to make online shopping more secure. Other issuers are piloting plastic cards that can access multiple accounts or require you to enter a PIN to use them.
The newfangled cards are being developed even as a spate of recent announcements indicate that mobile payment devices are getting closer to becoming a reality, hypothetically making the plastic card itself obsolete. Banks, cell phone providers, Google and Apple, to name a few, are reportedly working on mobile payment systems that rely on near-field communication (NFC), a short-range wireless technology that allows devices to transmit encrypted data.
But even the biggest believers in mobile payments agree that it will be at least a few years before the payment devices really take off, as companies compete to determine which technology will be most widely accepted and adopted. And then there's the problem of getting new readers to millions of point-of-sale retailers. So, credit card issuers are hedging their bets by investing heavily in mobile payment systems but also developing new products that appeal to customers and can work right now.
"There are 1.7 billion people who have cards in the world," says Todd Ablowitz, president of Denver-based Double Diamond Group, a consulting firm that focuses on payments strategy technologies and products. "Although mobile payments is the future, you're not going to move all that overnight to magical phones. So these are step innovations, rather than leap innovations. Some are very much needed, and some are probably not going to make it."
Pay with points or credit?
Ablowitz especially sees the value of cards that provide security features such as one-time passcode displays that work with European chip-enabled systems as well as magnetic stripe readers.
He remains somewhat skeptical, however, of Citi's 2G rewards card and other products that rely solely on programmable magnetic stripes. "I understand the benefits of working within the existing system, but the world is moving toward chip technology. You can put lipstick on the magnetic stripe and fancy it up, but at the end of the day, it still has just 70 bytes. You can't transmit a lot of information with such a small area."
Terry O'Neil, executive vice president of Citi's North America credit card division, said Citi developed the card based on feedback from customers who wanted to redeem their rewards more easily. He would not say how much it costs to make the cards or how many cardholders are using them, but he emphasized that the card has received positive feedback from testers, and that it's also being used to attract new customers. O'Neil said a decision will be made by the end of 2011 on how broadly to market the card.
"We wanted a product that could be widely used and widely accepted right away, so it was critical that it operate within the current infrastructure," he explains. "This card enables card members to redeem points for virtually anything they want at the point of sale, instead of being limited to catalogs and online."
Programmable magnetic stripes
The technology behind the card was created by Pittsburgh startup Dynamics Inc., which is also working on several other high-tech cards. CEO Jeff Mullen notes that while futurists have long predicted the end of the magnetic stripe -- also sometimes called a magnetic strip -- it is still by far the dominant payment mechanism in the world, and the network is growing.
"Magnetic stripe readers are being placed in more places than ever before -- like vending machines, movie theater kiosks and taxicabs," Mullen says. "Even in Japan, where the infrastructure is in place and phones have been distributed for seven years, the volume of phone payments is still significantly less than 1 percent share of transactions, and EMV term European chip cards comprise only about 10 percent of cards in world."
Citi's 2G card looks and feels like an ordinary card, yet it contains a battery that lasts four years and a tiny microprocessor. (It can be submerged in water without damage, Mullen says.) It has two tiny buttons and lights on the front: you press one to pay with regular credit, the other to pay with rewards points. If you don't have enough points, the transaction still goes through and is processed using credit.
In addition to the 2G, Dynamics is working on two other high-tech cards, and Mullen says major card issuers are currently piloting both:
MultiAccount cards: These cards can be programmed with two accounts, perhaps debit and credit. You select one before you swipe, and the magnetic stripe is rewritten so it draws from that particular account. It targets the consumer who values convenience.
Hidden card numbers: These cards, designed for those who worry about security, hide the full card number until a user enters a passcode that "unlocks" the card. Once the password is entered, the full number is displayed and the magnetic stripe is unlocked.
Innovations increase security
Dynamics is not alone in creating next-generation cards that aim to prevent credit card fraud. Los Altos, Calif.-based QSecure and New York-based Innovative Card technologies have both developed display cards that create a one-time authorization code each time the user presses a button. And then there are the cards with tiny built-in keypads and LCD screens developed by Swiss-based NagraID, already being used both by Visa and MasterCard Worldwide overseas. When the consumer enters a PIN on the keypad, a one-time-only code appears on the display. It replaces the security code printed on standard cards that you enter when you're shopping online.
In a recent press release, MasterCard announced it was teaming up with NagraID and Symantec to make the card available in the U.S., although it hasn't signed with any issuers yet. The Visa version of the card, called CodeSure, has yet to be released here, although an officer of a tech company that helped develop it said in an e-mail: "All I can say at the moment is that we are in the process of expanding our customer base beyond Europe, and the U.S. is definitely on our radar. I will be able to make a formal announcement in the coming months."
Other companies, meanwhile, are working on fingerprint-activated cards as another way to boost security. Banks have experimented with biometrics before, but the need for new hardware proved to be cumbersome and they had limited success. Now, a few startups, including Florida-based SmartMetric and Denmark-based CardLab, have created cards with an embedded fingerprint scanner. You have to scan your fingerprint to unlock the cards.
A final type of card doesn't look any different from a typical card, but it provides an unusual service that makes it high-tech: Citi MasterCard's inControl cards, to be made available to cardholders soon, can be programmed with spending controls and alerts. For example, you could create a monthly spending cap for dining out or clothes shopping, and tell the card to decline transactions once you go over that amount (or just have it send you an alert if you prefer).
"Let's say you have a high school student you don't want using the card past 5 p.m.-- you can do that," says MasterCard spokeswoman Erica Harvill. "Or you can set it so that a college student can only use it in the bookstore, not at the bar." A card that gives you control over your child no matter where they are? Now that's high-tech.
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