‘Everybody loves to spend money at least some of the time – because everybody loves the stuff you can buy with it. The key to the pleasure level of any transaction is the balance between the pain of the payment and the reward of the purchased object,’ said TIME editor Jeremy Kluger.
Of course, he may have been referring to ‘pain’ as having to lose money in exchange for the purchase - but all the same he may be referring to the technical ease of the transaction process overall. Payments have been revolutionised by, and defined by, card payments since the 1950s.
From Zip-Zap machines to the magnetic strips
By the 1980s, credit cards were commonly used to enable payments across large parts of the world. This year, Mastercard announced its intention to retire the almost-universal component of a credit or debit card: the magnetic strip. By 2033, none of its cards will offer a swipe alternative to chip and pin. In large part, this goes back to the point around ease of transaction - there are now easier and more secure ways to pay, leaving this technology largely defunct. But its impact on the payment industry is significant - and so will be its legacy.
The magnetic strip replaced arduous and often labour-intensive ways of processing card payments. I first joined the payments industry in 1992 in Moscow, Russia where I worked in the Card Acquiring Department for a few months. I vividly remember a big storage room in our office full of boxes with imprinting machines and slips ready to be sent to the merchants. Although magnetic strips were common across Europe and the US by this point, they were not as ubiquitous as they are today and certainly were not used in Russia until after my career began.
Before the strip, merchant employees recorded transactions by using what was essentially a tiny printing press to imprint the raised letters and numbers from a card onto a three sheet, pressure-sensitive paper form. These were called Zip-Zap machines – or colloquially known as Knuckle Busters because of the movement required to operate it. You might remember these yourself if you’re from that generation, or perhaps have seen one in an old film.
One of those sheets was then sent to an issuer, one was given to the cardmember, and one kept by the merchants. The merchant employee had to call the authorisation service to get an approval for a transaction over a certain value. It could take 10-15 minutes for a cardholder to use a card to pay.
The magnetic strip ended all this: it offered instant authorisation, enhanced security and was easy for businesses to accept. The strip offered an inexpensive solution for both banks and merchants, acting as a catalyst that accelerated the development of the payment credit card industry. Our global payment and transaction systems are in many ways a legacy of the magnetic strip. In fact, you could say that magnetic strip was for payments what the barcode was for inventory and supply chains.
Is the industry ready to say goodbye to the magnetic strip?
Now with the development of contactless technology and chip and pin, the job performed by magnetic strips can be done in other ways. Mobile phones are already becoming another important means of making purchases.
The microchip in a card is much more difficult and less financially feasible to duplicate because of the sophisticated and expensive technology required. Visa reports that counterfeit card fraud has decreased 76% for merchants who’ve upgraded to chip card technology. Biometric cards take this a step further and are seen as a key new tool in payment security. When using a phone, it is the phone itself that provides the security rather than the chip - using encryption and tokenisation to keep card data safe.
Shifting to contactless technology and chip and pin reflects how fast payment habits are changing today. Smartphones are central to our daily lives. We use them to manage our personal and business affairs, watch films, track our health and, increasingly, make payments. Adoption of mobile payments is rising considerably worldwide, with predictions estimating it’ll be the second most popular way to pay by 2022.
But it’s not the final farewell to the magnetic strip. For many merchants and cardmembers, the capabilities of the magnetic strip are still an important part of the transaction process because they, for example, may not have a chip and pin card. Payment technologies should still consider financial inclusion, leaving no one behind.
About Aleksei Maslov
Aleksei Maslov is Russian Deputy General Manager at JCB International (Eurasia) LLC. Prior to joining JCB, Aleksei was Adviser to the First Deputy Chairman of the Central Bank of Russia in 2012-2013 and previously was the first Chief Executive of the Association `National Payment Council`, established in 2011. He joined American Express in 1992 as an employee in the Credit Card Division; since 1993 he was in charge of American Express Travelers Cheques and Pre-Paid Cards in more than 10 countries (Russia, CIS, Turkey, Israel and the Baltics). In 2009 he moved to the Global Commercial Cards and became Head of Global Cards Russia and CIS and later CEO of American Express Bank LLC. Aleksei has authored a number of articles on banking systems of different countries, as well as on the functioning and legal status of the Bank of Russia, the payment industry and payment products in Russia.
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