The rise and fall of the credit card magnetic stripe
Editor's note: For the latest on the evolution of the credit card magnetic stripe, see "Magnetic stripe begins its farewell tour."
Four decades after its creation, the credit card magnetic stripe has revolutionized the way we make purchases and share personal information. New technology, however, is threatening to send the magnetic stripe the way of the VHS player.
Before the familiar stripe vanishes for good, though, it's worth reflecting on the technology that IBM proudly named one of its top 100 contributions to society.
That day could be coming quickly, as even the man whom IBM calls "the father of magnetic stripe credit cards" says its days are numbered. "My guess is the stripe will disappear," says Jerome Svigals, the project manager who engineered the technology for IBM in the mid-'60s that would make it possible for the cards to be used in readers all over the world. "It's already disappearing -- you don't see the stripe on mobile phones or smartphones -- but you do see the equivalent information content on chips and they emit that into the network. The information structure will be around forever."
How it began
Forrest Parry, an IBM engineer, is credited with the first success in the early '60s with attaching the magnetic tape to a plastic identity card for officials of the CIA by essentially melting the strip on. That technology was greatly refined for credit cards by Svigals' team.
In 1954, Svigals was IBM's first employee hired to market the "professional computer." IBM was developing computer systems and the company wanted a way to help increase their adoption. So Svigals was tasked to develop a technology that would encourage database access. The magnetic stripe, originally used on paper tickets by the London Transit Authority for the London Underground, was the starting point.
Part of the urgency for new technology came from the airlines, says Svigals. They were looking for a way to streamline ticket purchasing, check-in and boarding for the boom in passengers who came with the advent of large-body aircraft such as 747s. Also, banks were looking for a way to have machines take money from a customer's account automatically from remote locations and also accept deposits. Thus, at the same time he was developing the magnetic stripe, Svigals was also project manager for IBM's ATM, which debuted in 1973.
But perhaps the biggest driver for the stripe technology was the prevalence of credit card fraud in the '60s, which was hard to prevent with the lag between purchase and account verification. Using a device called a zip-zap machine, a merchant would apply a roller over paper covering the raised numbers on the customer's card, then physically take the paper to the bank. The bank would read it optically and manually check the number against known fraudulent accounts. That process could take days.
The big breakthrough
Over seven years, Svigals led a team that found a way to use magnetics to record personal and financial information onto tape adhered to the back of a card that could be inexpensively and reliably decoded by a machine.
In 1970, the credit card's magnetic stripe had its first big test when it was rolled out in a joint pilot project by American Express, American Airlines and IBM at Chicago's O'Hare Airport. IBM accepted the team's recommendation to adopt the technology in 1973, and it rolled out bank cards and employee ID cards.
However, it wasn't until 1980 that the price of the technology became acceptable to Visa and MasterCard, Svigals says. The original cards cost about $2 per card to produce, he says, but with economies of scale and improved production methods, they came down in price and cost less than 5 cents per card to produce just before MasterCard and Visa came on board.
Now a swipe of a credit card or debit card in an electronic reader sends the customer's information to the bank that issued the card. The bank's computers verify that the cardholder has sufficient credit or funds to cover the purchase and can either approve the request or decline --- all within seconds.
The technology helped transform the mass transportation, banking and retail industries. That led IBM, as part of the company's 100-year anniversary celebrations in 2011, to list the stripe as one of its top 100 contributions to society. The card's impact is also reflected in the rapid growth of credit cards since the stripe's introduction: U.S. credit card balances grew from $9 billion at the beginning of 1973 to $796 billion in March 2011, Federal Reserve statistics show. And in 2003, for the first time, more consumers relied on magnetic stripe credit and debit cards than on cash for their in-store purchases, according to the Wall Street Journal.
Stripe's days are numbered
Through the decades, the magnetic stripe has stayed the same in content, width, density and tracks. The stripe's staying power comes as no surprise to Al Vrancart, International Card Manufacturers Association adviser and founder. "It's a low-cost solution that works," he says. "It has served the market extremely well since the 1960s. You cannot walk into any kind of an establishment and not see a mag stripe reader on the counter. Everything about that was perfected, and it did thwart fraud over the years."
But changes in technology and consumer tastes are finally bringing change. For example, Citi has tested a product called the 2G card, which features a programmable magnetic stripe and allows users to pay either with standard credit or rewards points by pushing a button on the card that changes information on the stripe. A Citi website says more information on the card will be forthcoming.
In another sign, the European Payments Council passed a resolution this year allowing banks "to refuse magnetic stripe transactions if they so wish." Many countries have largely moved to the chip-and-PIN system where information is transmitted through a smartchip and secured with a PIN, and the U.S. is facing pressure to follow suit. In spring 2011, Chase, Wells Fargo and U.S. Bank all announced they would test or market cards that use the chip-and-PIN, though they would still have magnetic stripes.
Still, Vrancart predicts the stripe will be replaced not by a different card, but by smartphones. Cashless consumers pining for a Starbucks Cinnamon Dolce Frappuccino don't need to pull out plastic anymore. They can instead whip out their iPhones and fire up the Starbucks card mobile app. The app calls up a bar code that the barrista scans in to debit your preloaded gift card.
The latest sign is Google's news that it is launching its Wallet app so that your mobile phone can eventually store all the information now encoded in your payment cards.
Svigals knows the magnetic stripe's days are numbered, too. In fact, his latest publication, titled "Retail Bank 2020: A Roadmap to the Future," describes a cardless, checkless banking world by 2020 where smartphones and the Internet rule. But he also says the original concept of the stripe will last.
More than just a mag-stripe maker
Svigals considers the magnetic stripe his biggest achievement among his myriad accomplishments. He worked on developing the first electronic computer in 1950 when he was an Army lieutenant, and became one of the world's first digital programmers. He devised the strategy of selling computer support services and eventually ran IBM's global marketing system.
"I think the mag stripe was, by far, the biggest for the very simple reason that it's used by 80 percent of the people in the world," Svigals says. "Except for lead pencils, that's a pretty good accomplishment."
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