Goodbye Magnetic Stripe, Hello Security
Ever think about how tough it must’ve been to catch criminals in the Wild West, relying just on wanted posters and word of mouth?
In a way, that’s kind of how things were before the magnetic stripe credit card was introduced; merchants had to check a list of fraudulent credit card numbers by hand before accepting plastic payment.
Does the U.S. Credit Card Industry Need a Security Upgrade?
When such inefficiency made way to modern technology in the 1960s, credit card information contained in a magnetic stripe placed on the back of a card began to be automatically cross-checked at the point of sale against a database of fraudulent cards via the phone lines. While this magnetic stripe technology has obviously been tweaked and improved over the years, it still serves as the foundation for payment security today – a fact which begs the question: Is credit card security in need of an upgrade?
In answering this question, the first thing you need to know is that credit card fraud is not nearly as widespread as one would think; it only affects about 0.05% of all credit and debit card transactions. The second thing you need to know is that every Group of Eight member – Canada, France, Germany, Italy, Japan, Russia and the United Kingdom – other than the United States, has already moved on to credit card technology that is more advanced than the magnetic stripe – something called chip and pin, which involves consumers entering a PIN number at the point of sale that must correspond to a microchip embedded within their card in order for a purchase to be approved.
Magnetic Stripe on the Way Out
With that being said, the U.S. is long overdue for a credit card security upgrade and the wheels of change are already in motion. In response to growing consumer concern about the applicability of U.S. credit cards to overseas spending, Wells Fargo, Chase and U.S. Bank last year began offering chip and pin-enabled cards to certain customer segments. Visa has also announced its intention to expedite the infrastructure needed to support chip-based payments and will provide certain incentives for merchants to enable their businesses to accept such payments.
NFC Mobile Payments on their Way
Still, we shouldn’t expect the U.S. to simply transition to the same chip and pin credit cards used abroad. Not only would this be out of character for a country that likes to lead and innovate, but there is also growing momentum for chip-based mobile technology, which provides the security of a chip and pin card on your cell phone. This technology is called near-field communication, which is a derivative of the radio frequency identification technology that powered previous, ill-fated attempts at bringing contactless payments to the U.S.
NFC is different from RFID in the sense that it diminishes the range of communication between an enabled device and a merchant’s reader from meters to just four inches, thereby dramatically decreasing the chance of interception by an unauthorized third party.
In addition, while NFC chips embedded within phones serve to communicate with a merchant’s reader, the payment information they relay is stored and encrypted on a secure element, which typically resides in a smart card chip, such as a secure digital card. Cell phone smart cards have built-in, anti-tamper technology that detect hacking attempts and prevent unauthorized access to the information stored on them.
What’s Different This Time Around?
Yes, the current manifestation of mobile payment technology seems to be more secure, but will that alone result in it catching on where contactless payment methods like the Visa payWave, MasterCard PayPass and American Express expresspay fell short?
Not necessarily. Earlier attempts failed to gain widespread support for three reasons: questions about data security, lack of infrastructure and lack of benefit in the eyes of consumers.
These things seem not to be problematic this time around, given the security improvements of NFC and Visa’s dedication to bringing forth the requisite infrastructure without overburdening the parties involved. Perhaps most important, though, is the fact that consumers have a clear reason to embrace change this time around. Contactless mobile payments could mean not having to carry one’s wallet. People didn’t really care whether they had to swipe a card or wave it over a payment terminal, but they are likely to recognize the practical benefits of mobile payments.
If rumors and reports are true, the iPhone 5 – expected to drop this fall – will include NFC. Select Android phones already come with this technology, which enables consumers to use Google Wallet and other similar applications to turn their cell phones into a wallet replacement, of sorts.
Google Wallet allows users to sync a credit card with the application and simply wave their phone over a payment terminal in order to make a purchase. The app also has more widespread utility, particularly related to daily deals. Consumers can waive their phones over NFC receivers on store displays, movie theater posters, bus bench ads, what have you, and thereby add deals and discounts to their virtual wallets.
Future is Now
It was inevitable that magnetic stripe technology would at some point become obsolete, the only questions were when and what would usurp its place in the U.S. payments landscape. The answers appear to be very soon and NFC mobile technology. The good thing about this is that it will make credit card payments more secure and convenient; the bad thing is it may take some getting used to.