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Reinventing the payment industry

MasterCard's Chris Thom examines how new authentication technologies are changing credit cards.

It amazes me that something as modern as the credit card has been around for more than 40 years.

During its history, it has changed more than its appearance to keep up with the times. The seemingly simple credit card has had to adapt to the growth of the world economy and consumers' purchasing preferences.

The payments industry has reduced the incidence of payment card fraud from the peaks seen in the early 1990s to extremely low levels today. Still, there was a time when a credit card purchase could actually cause a bit of pain--at least for those working the checkout lines.

Years ago, salespeople manually used what were known as "sliders" to record credit card information at the point of sale. If they did not correctly slide the clumsy device across a card, their fingers could get caught in its works.

The magnetic stripe itself may be now nearing the end of its lifecycle.

But as cards permeated beyond local borders and became prime purchasing instruments for a rapidly emerging global economy, sales clerks' fingers were not the only things at risk. Consumers, as well as the industry, were feeling the pain from these devices, because that signature click-clack sound of a card being swiped eventually sounded the alarm for an all-time high in credit card fraud.

In their heyday, sliders left a trail of carbon copies and provided criminals with plenty of opportunities to counterfeit cards and create illegitimate transactions--something made even easier by the lag in the time it took to submit sales slips and process transactions. As commerce expanded far beyond a consumer's hometown and surrounding communities, and the risk of fraud losses increased, it became clear that the industry had to do something to reinvent the system.

Magic of magnets
The solution was the widespread implementation of the magnetic stripe on the back of payment cards along with special point-of-sale readers to scan and transmit their data electronically. The payments industry innovated by taking a page from the mass transit industry's playbook. Created in the early 1960s, magnetic stripes were originally used in the London Underground and the Bay Area Rapid Transit system to authenticate passengers' tickets as they boarded the trains.

What worked in transit also worked in payments. Card transactions became increasingly automated as data was passed through the system much more quickly and efficiently. By swiping the card through these terminals, the necessary information would directly flow through the banking networks, eliminating both the need to manually submit embossed sales slips and the lag in processing time. These new magnetic-striped cards also sped up the checkout line, giving consumers more convenience in addition to more security.

In the retail environment, the magnetic stripe helped take card transactions online and out of the range of most criminals. This technology revolutionized the credit card industry and facilitated enhanced data transmission. This, in turn, successfully helped knock the global fraud rate down to mere pennies for every hundred dollars processed.

The new era
Certainly, a new era of security and convenience had been ushered in.

In this age of expanding global commerce, we are in the midst of yet another payments revolution. Not even 10 years ago, a huge majority of payment transactions occurred in a place of business, face-to-face, salesperson to customer. Now, that trend is drastically changing. MasterCard just recently sponsored a consumer survey that found that nearly 75 percent of respondents plan to do some online shopping for this upcoming holiday season; and the Tower Group predicts by 2008, 44 percent of all retail transactions will be virtual.

The magnetic stripe itself may be now nearing the end of its life cycle, and as the way we all shop evolves, so, too, will the payments system. It is being continuously bolstered by improvements and support as we welcome a new era of payments security.

Technological advances have also introduced new challenges for the payments industry. In the online realm, there continues to be the challenge of authenticating transactions during which the customer and the card are not seen by the merchant.

Though it may not seem like technological wizardry, the little three digit number on the signature panel on the back of every payment card has been one effective way for merchants to validate that the person making the purchase has more than just a card number pulled out of the trash--they have the actual card.

But this is just the beginning. We have already witnessed the advent of additional online authentication systems providing increased security through user-generated PINs or passwords, thereby assuring merchants and cardholders that transactions are authorized. The cards we all use are themselves changing, incorporating new technology that will facilitate extremely secure transactions, whether you are purchasing breakfast in London, dinner in Taipei or a gift online from your hotel room--all with the confidence that these transactions are sound.

And not far off is the day when, through the assignment of an ever-changing access code, every transaction will be unique, incapable of being replayed and utterly useless to the criminal fraternity.