Okay, so not dying doesn’t sound like it could be one of the greatest developments of the decade. It is on my list because it some of the greatest developments in the last decade were the failure of massive efforts to displace the humble magstripe card. It is also on my list because it serves as a reminder that innovations in payments have to make people and merchants significantly better off to gain traction.
The magnetic stripe was developed in the 1950s by Frank Parry at IBM. He developed the technology for including security information in the stripe. He wanted to put it on the back of plastic cards but couldn’t figure out how to make it stick. As the story goes, when he mentioned his problem to his wife she said “Here, let me try the iron.” That worked. The mag stripe card was first used in the 1960s by the London Transit and San Francisco Bart. I’ve had trouble pinning down the history of when it was first adopted for general purpose payment cards but it seems to have been in the 1970s. But in any event mag stripes widely used by the early 1980s when merchants moved en masse to installing electronic terminals at the point of sale. Billions of plastic cards with mag stripes on the back have been printed over the years and more than a billion mag stripe payment cards are in use in the United States along.
The mag stripe is primarily an authentication technology. Swiped at the point of sale it sets in motion the electronic process of sending signals up the line to the central switch where cards are authenticated and authorization decisions are made. People around the world have grown accustomed to swiping or sticking their cards so the mag stripe hits the heads of the readers that have been developed especially for this technology.
But, really now, magnetic stripes? It seems so quaint. In the age of the iPod and Tivo you are certain to mark your age by acknowledging that you listened to music on cassettes or used to watch movies on a VCR.
Those with a penchant for technology have seen far better alternatives for decades now. Many card systems toyed with smart cards in the 1980s — card that had computer chips in them. Most dropped the idea when it became apparent that smart cards were expensive and there wasn’t a business case for deploying them.
Smart cards came back in vogue this past decade in two forms designed to eventually kill off the mag stripe. In the United States the push was for contactless. Consumers were issued cards that coupled a mag stripe with contactless chip so that consumers would waive the card at merchants that had contactless readers. Although millions of people have these cards merchants that account for a significant amount of payment volume have resisted spending the extra money for contactless readers and consumers haven’t gotten in the habit of waiving. In Europe the push was for chip and pin. That was primarily for security reasons because many card transactions in Europe are still done offline (with limited fraud control) and fraud rates were high. The cards have a smart chip in them and cardholders type in a pin to authenticate themselves against information on the chip. About half of the Visa cards in Europe now have a chip. As with contactless cards these cards also have a mag stripe.
Why has the mag stripe technology proved so resilient? I think the answer is simple. It is really inexpensive to issue mag stripe cards and at least nowadays the point-of-sale technology for reading mag stripes has been perfected and benefits from economies of learning and scale. The process of swiping a card at the point of sale is extremely fast. In the United States fast computers in the distance make authentication and authorization hyper quick. To displace mag stripe it is necessary to come up with something truly better for all of the participants in the card transaction including consumers, merchants, acquirers, merchant processors, networks, and card processors.
This isn’t the place to debate how contactless and chip-pin will develop. Like many though, I believe the long run will involve the use of mobile devices to pay the point of sale instead of plastic cards. But I’m least agnostic on the authentication technology that will ultimately dominate on mobile devices.
If I had to make a prediction though it would be that at the end of the next decade most cards will still have a magnetic stripe on the back of them and most merchants will still have card readers that can accept these cards. We may well be far along a major transition to contactless mobile devices by then in the United States but I’m at least dubious that the process will be completed by then. Whose to know though? Maybe in 2019 I’ll have the replacement of the mag stripe card on my top 12 list.
Previous Great Developments in Payments During the Last Decade: