In the early age of modern credit cards, they had to write
down account information for each card-carrying customer by hand. Later, they
used flatbed imprinting machines to record the card information on carbon paper
packets, the sound of the swiping of the handle earning them the name, zip-zap
machines. (They were also dubbed “knuckle-busters” by the unfortunate clerks
who skinned their fingers on the embossing plate.)
And how could clerks tell whether the customer was good for
the purchase? They couldn’t. Credit card companies would circulate a list of
bad account numbers each month, and the merchant would have to compare the
customers’ cards against the list.
The arrival of the magnetic stripe changed all that. An
early 1960s innovation largely credited to IBM, the magnetic stripe allowed
banks to encode card information onto magnetic tape laminated to the back. It
paved the way for electronic payment terminals and chip cards, offering more
security and real-time authorization while making it easier for businesses of
all sizes to accept cards. That thin stripe has remained a fixture on billions
of payment cards for decades, even as technology has evolved.
But now the magnetic stripe is reaching its expiration date
with Mastercard becoming the first payments network to phase it out.
Based on the decline in payments powered by magnetic stripes
after chip-based payments took hold, newly-issued Mastercard credit and debit
cards will not be required to have a stripe starting in 2024 in most markets.
By 2033, no Mastercard credit and debit cards will have magnetic stripes, which
leaves a long runway for the remaining partners who still rely on the
technology to phase in chip card processing.
Crediting history
Paying on credit is a concept that dates back thousands of
years to agrarian cultures, predating even paper money. In the early 20th
century, department stores, gas stations and even airlines offered metal
“shopper’s plates” or cards to its customers, but the first modern universal
payment card debuted in 1950. The cardboard “charge” card could be used at any
participating merchant and featured the cardholder’s name, address and account
number.
By the end of the decade, other merchants and banks started
issuing their own cards, including the first plastic credit card in 1959. The
cashier would take an imprint of the card and send the paper copy for
reconciling and billing, a process that was slow and open to human error.
In the 1960s, IBM saw the potential of coding information
onto cards via magnetic tape. That technique was already being used for audio
recordings and computer disk storage before it was brought to cards.
According to IBM lore, engineer Forrest Parry couldn’t
figure out how to combine a strip of the tape to a plastic identity card for
the CIA and mentioned it to his wife, who suggested using her flat iron to melt
the strip to the badge. It wasn’t exactly the kind of hardware IBM would be
celebrated for, but it worked.
Chipping away at better security
Even before the ascendency of the magnetic stripe, engineers
had been pursuing the idea of a card powered by a computer chip that could
perform the complex calculations that would enable even stronger security
measures.
The first chip card made its debut in France in the 1960s,
but it took years to catch on. One major problem — different chip cards didn’t
work with every terminal. That led to the development of a global EMV chip
technology standard. .
Today, for every transaction, the chip creates a unique
transaction code, which is validated by the issuing bank to ensure that the
genuine card is used. That tech also increases the security of a cardholder’s
data.
Since the late 1990s, with the introduction of the EMV
standard, chip cards started becoming the preferred way to pay. Today, EMV
chips are used for 86% of face-to-face card transactions globally.
More than half of Americans prefer using a chip card payment
at a terminal over any other payment method, with security being the driving
factor, according to a December survey for Mastercard by the Phoenix Consumer
Monitor. That was followed by contactless payments — with a card or a digital
wallet. Only 11% said they preferred to swipe, and that drops to 9% when
looking at cardholders with experience using contactless payments.
And in a July study by Phoenix, 81% of American cardholders
surveyed reported they would be comfortable with a card that does not have the
magnetic stripe, and 92% would increase or keep usage of their cards the same
if the magnetic stripe was no longer on the card.
“It’s time to fully embrace these best-in-class capabilities,
which ensure consumers can pay simply, swiftly and with peace of mind,” says
Ajay Bhalla, president of Mastercard’s Cyber & Intelligence business.
“What’s best for consumers is what’s best for everyone in the ecosystem.”
By 2029, no new Mastercard credit or debit cards will be
issued with a magnetic stripe. Prepaid cards in the U.S. and Canada are
currently exempt from this change.
“The merchant community looks forward to a day when
requirements to support the magnetic stripe and the burden to protect data
merchants really don’t need are eliminated,” says John Drechny, CEO of the
Merchant Advisory Group, which represents more than 165 U.S. merchants. “We
applaud Mastercard for taking this next step to help to strengthen payment
security and protect merchants and consumers from risk. We’d like to see others
in the industry move in this direction.”
Paying it forward
While changes in how we pay and process payments have
typically taken years to become ubiquitous, the pace of digital transformation
accelerated rapidly during the pandemic. In the first quarter of 2021,
Mastercard saw 1 billion more contactless transactions compared to the same
period in 2020, and in the second quarter of 2021, 45% of all in-person
checkout transactions globally were contactless.
Consumers also are increasingly willing to experiment with
new payment options. Nearly two-thirds of respondents in Mastercard’s recentNew Payments Index, a global survey, say they tried a new payment method they
would not have tried under normal circumstances.
These new technologies are much simpler to enable, making
them more accessible to even the smallest merchants. For instance, Cloud Tap onPhone, which turns phones into acceptance devices, requires no additional
hardware or peripherals.
EMV technology also is evolving to become even more secure —
earlier this year, Mastercard developed new quantum-resistant specifications
for contactless payments. That change will help protect cardholders and
merchants from fraud for decades to come with the same half-second, tap-and-go
experience of today — and without any physical changes to the digital wallets,
contactless cards and point-of-sale terminals.
And so the swipe will soon go the way of those skinned
knuckles. “True progress also means retiring technologies that no longer meet
our needs,” says Howard Hammond, executive vice president and head of consumer
banking at Fifth Third Bank. “The way we shop, pay and interact is changing,
and we are meeting these evolving needs with smarter and more secure
experiences.”
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