Modern Payment Technology: Smart Cards and Mobile Wallets Move
by Mike Giusti
For decades, when people mentioned credit cards, they meant one thing: a plastic card with raised numbers on the front and a black magnetic strip on the back. But with increasing fraud concerns and exploding technological capabilities, a host of new payment cards are now filling wallets around the globe.
Here is a quick rundown of the dominant card technology available today.
The trusty old magnetic strip, or “mag stripe,” cards have been in use as a payment method for more than three decades. Within just a few years of their introduction, they became nearly ubiquitous.
With these traditional cards, a magnetized metallic strip carries the information needed for a payment transaction encoded on three “tracks” embedded in the strip.
When a customer swipes the card to make a payment, the card reader extracts the account number, the expiration date and other information needed to communicate with the account holder’s bank and speeds it onto a high-speed payment network.
The growth of magnetic strip cards was powered in large part by the low costs involved in the mass production and distribution of those cards, explained Jeffrey Green, Vice President of Digital Media at PYMNTS.com, . “The primary benefit of magnetic strip cards is that nearly every merchant in the United States accepts them as payment,” said Green. “But their primary drawback is their vulnerability to fraud.”
That’s because scam artists have found ways to use devices called “skimmers” to intercept the information encoded on those magnetic strips and use them to make fraudulent purchases.
Fear of fraud has driven most industrialized countries to shift their payment networks to so-called “smart card” networks. Smart cards have embedded microchips that carry the account and other identifying information. They also carry extra technology to keep scam artists from creating a fraudulent copy of the card.
“The chip in the card securely stores cardholder data and includes strong transaction security features and other application capabilities,” said Randy Vanderhoof, executive director of the Smart Card Alliance and its EMV Migration Forum. “A mag stripe card, on the other hand, has minimal security because data is very easily read from and written to the card.”
Rather than swiping the card through a reader, consumers slide smart cards into terminals equipped to read the card’s encrypted data. Then, to verify that the card is theirs, consumers typically have to enter a PIN, which unlocks the chip and makes the data readable by the terminal.
The international standard for chip-based smart cards is known as EMV, an acronym that stands for Europay, MasterCard and Visa. “The EMV specifications were developed to define a set of requirements to ensure interoperability between chip-based payment cards and terminals,” Vanderhoof said. Merchants in more than 130 countries are using EMV technology, and more than 80 countries are migrating towards the technology on a national scale. The EMV standard is so common internationally that some U.S. travelers may run into difficulty abroad, said Pete Bartolik, a spokesman for San Jose, Calif.-based credit card terminal manufacturer VeriFone.
“U.S. mag stripe card holders traveling overseas may increasingly run into situations where they have difficulty completing a transaction either because the merchant mistakenly believes he can only accept EMV or they are trying to make a purchase at an unattended kiosk where EMV PIN authentication is required,” Bartolik said.
While chip cards are still relatively rare in the United States, they will soon become the norm. That’s because the major card providers have all set deadlines to mandate that stores accept EMV technology in the very near future. The vast majority of cards will likely be EMV compatible by 2015.
A much less common payment technology allows people to pay with their smart card simply by tapping the card on or waving the card over a reader at the cash register. This technology, known as “contactless,” relies on a tiny radio transmitter to exchange the payment information with the register – no swipe required.
“In the U.S., more than 17 million contactless payment cards have been issued to consumers. Contactless payments are a really convenient way for consumers to pay because they can simply tap their card to a reader to make a transaction,” Vanderhoof said.
The current contactless technology in the United States includes small chips, known as radio frequency identification, as well as a more robust wireless protocol known as near-field communication.
The current incarnations of contactless cards haven’t moved much past the realm of novelty, but many analysts are hopeful that once contactless technology meets the EMV standard, a world of opportunity may open up.
“With the U.S. moving to EMV, it’s very possible that contactless payment technology will become more popular with consumers, issuers and merchants in the years to come,” Vanderhoof said.
Some analysts are even predicting that the future of electronic payments may ditch the cards entirely. These types of transactions might rely on mobile phones that use wireless transmitters for contactless transactions or even biometric sensors identifying customers by their fingerprint or retina scan.
The most advanced ideas of a mobile-based payment system are known as mobile wallets. With a mobile wallet, consumers can load multiple cards into one device and choose the preferred payment method for each transaction, all without carrying an actual wallet of cards.
Regardless of what the technological future holds, one thing is clear: electronic payments will continue to evolve, facilitating commerce in increasingly secure, cool and convenient ways for years to come.