For 40 years, the magnetic stripe has served the credit card processing industry well. It revolutionized shoppers’ buying habits, set the standard for sharing personal information and made real-time processing possible. Already replaced by EMV technology worldwide, the mag stripe is about to be phased out in the U.S. as well. Before it disappears, let’s take a look back at its history.
Originally used on paper tickets on the London Underground, the mag stripe concept was borrowed by IBM to develop database access for the professional computers it was developing in the mid-1950s. It was also quickly adopted by airlines, who used it to streamline the ticket purchasing/check-in/boarding process, and by banks, who were experimenting with early ATMs.
But the biggest impetus for the development of mag stripe technology was a rise in credit card fraud during the 1960s. In those early days of credit card processing, merchants would use a flatbed “knucklebuster” machine to make an imprint of a card on a multi-sheet receipt, which then had to be physically transported to the bank where the account number would be checked against a list of known fraudulent accounts. It was a time-consuming process that often took days to complete and was highly susceptible to fraud.
The mag stripe was first tested in a joint pilot project by American Express®, American Airlines and IBM at O’Hare Airport in Chicago in 1970. Three years later it was put to work on bank cards and employee ID cards. MasterCard and Visa adopted the mag stripe in 1980 after production costs dropped from about $2 per card to just a nickel per card.
The mag stripe revolutionized credit card processing, contributing to an increase in U.S. credit card balances from $9 billion in 1973 to $796 by 2011, according to Federal Reserve statistics. This simple-yet-complicated idea allows cards to be swiped through an electronic reader in a terminal that encrypts and sends the data to the issuing bank. Once the bank verifies that the cardholder has sufficient credit to cover the purchase, it sends an authorization to the merchant, who completes the transaction – all within seconds!
As part of its 100th anniversary celebration in 2011, IBM included the mag stripe as one of its top 100 contributions to society, a list that also includes the Selectric typewriter, IBM punched card, personal computer and the rise of the Internet.
The mag stripe has truly been a workhorse when it comes to information technology and credit card processing, but its days are numbered. Europe and much of the rest of the world has already adopted EMV cards (sometimes called chip-and-PIN), which rely on microchip technology to do what the stripe does (and far more securely, too.) Additionally, mobile payment options that turn smartphones into wallets are catching on, particularly among the younger generation.
Even the “father” of magnetic stripe credit cards acknowledges that it’s down, but not totally out. “My guess is the stripe will disappear,” says Jerome Svigals, IBM’s project manager who engineered the mag stripe technology. “It’s already disappearing – you don’t see the stripe on mobile phones or smartphones – but you do see the equivalent information content on chips and they emit that into the network. The information structure will be around forever.”
To learn more about magnetic stripe, contact Merchant Express. Merchant Express offers credit card processing and merchant accounts to small and medium-sized businesses.
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