We’ve been hearing the refrain for years: the US is losing the credit card technology race. In Europe they have microchips. In Asia, people pay with their phones.
You’d think it’s only a matter of time before the US dumps its ancient magnetic stripes and joins the 21st century.
“The US started deploying magnetic stripe readers in the late 60s,” says Jeff Mullen,CEO of Dynamics, Inc. According to a leading maker of credit card terminal parts, GAO Research, there are over 10 million magnetic stripe readers in the US today.
But Mullen isn’t jumping on the dump-the-stripes bandwagon. Last month, his company debuted a new technology they’re calling Card 2.0. Each of Mullen’s credit cards has a fully functional computer inside, controlled by touch-sensitive buttons on the card surface. Card 2.0 plastic works with all of those 10 million stripe readers in the wild, and merchants don’t even have to know you’re using a special card.
To answer your next two questions: the battery lasts years and you can bend it, sit on it, and run it through the washer without breaking it.
Why do you want buttons on your card and a computer in your pants? Features. The first Card 2.0 plastic to hit the market is a rewards card. Press one button to pay with credit. Press the other button to pay with reward points. (An LED lights up to confirm your selection.) “You could be in Spain, in a back alley, in some restaurant, and you could decide, ‘I want to spend my points,’” said Mullen “And the merchant doesn’t have to be involved in the process.”
This makes banks salivate. Citigroup‘s (C) Citibank, in particular, found Dynamics’s offering mouthwatering enough to snap it up; the card is currently in a trial phase and will be available to the general public as the Dividend 2G and PremierPass Elite 2G cards, beginning next year.
Contrary to popular belief, it doesn’t make banks happy when you accumulate reward points and forget to spend them. Those points represent a liability on the bank’s books, and they’d love to encourage customers to spend the points as mindlessly (and impulsively) as possible. At the same time, they don’t want to make reward points seem too much like dollars, because then they lose their allure and customers get bored. Citi and Mullen are banking that Card 2.0 will strike the right balance. “If you can give the consumer a function, an app, that they like, you can attract them,” said Mullen.
The 800-pound gorilla in your wallet
Meanwhile, a company in Bentonville, Ark., is experimenting with European-style chip cards, also known as EMV cards. And by company I mean mega retailer Walmart (WMT). The goal: fraud prevention. EMV cards generally require a PIN and feature cryptographic secret sauce that makes them harder to forge and harder to use fraudulently than magnetic stripe cards.
“There is growing pressure to convert to EMV chip and pin,” says Dennis Moroney, research director at TowerGroup and an expert on bank cards. And if any company can coax the US onto the chip wagon, it’s got to be the country’s biggest retailer, right?
Mullen isn’t worried. “I don’t see Walmart as a competitor. I view them as a merchant,” he said. “So I view them as a potential customer.” Furthermore, Mullen says, the computer in his cards would, in principle, be just as happy talking to a chip as to a magnetic stripe. “That being said, it’s highly unlikely that you’re going to see EMV in the United States.”
Dynamics markets its own fraud prevention card, the Hidden Card, which requires the user to enter a PIN on the card itself in order to reveal the number and activate the magnetic stripe. It’s pitched to the jittery, security-conscious consumer, perhaps a victim of prior credit card fraud. (If you forget your PIN, however, you will be standing at the checkout looking like a jackass, especially if you’re the first on your block to get the Hidden card.) Citi hasn’t announced plans to offer the Hidden Card.
Mullen has one other card up his sleeve: a MultiAccount card that offers two different accounts on one card. It could be debit and credit; business and personal; or the maxed-out card and the not-quite-maxed-out card. (That last one would be kind of risky, though, in the event that you forget which is which.)
Does it work?
Card 2.0 is in limited trials at this point, and I don’t have one. (Mullen does. He recently used it at Taco Bell.) If Citi is reading, I’d love to run one through my washing m—er, take one to the mall.
In the meantime, I asked TowerGroup’s Moroney whether he thought computerized cards would be a hit. He liked the idea. “If US merchants can squeeze more functionality out of existing infrastructure, they can delay their investment in the new technology,” he said.
Could Card 2.0 introduce new security risks? I put the question to Bruce Schneier, a computer security expert. Maybe, he said, but as long as card companies are taking the risk, it’s irrelevant to the customer. “It’s not your liability,” said Schneier. “Why do you care?”
That’s not to say I’m a Card 2.0 cheerleader. Two big questions remain.
1. Will the cards be 100% reliable? (Or at least as reliable as the card I’m always cursing at while I swipe it over and over in the debit machine?) With any new technology, there’s inevitably some problem that doesn’t surface until it’s in the public’s hands. To a brand-new product, this can be fatal.
2. Will customers care? Card 2.0 makes a great demo. Even if it works as advertised, however, it has to deliver on its promises of fraud prevention and customer loyalty, or it’ll slink off quietly to hang out with those his-and-hers traveler’s checks.