Payment Systems in the Mainstream Media

Over the last week, I've run across a series of very well-written payment systems articles in the mainstream media that are worth your time.

In last Sunday's (Oct. 17, 2010) New York Times, Digital Domain columnist Randall Stross (author of many classic technology culture books) writes that "Maybe Your Old Credit Card Is Smart Enough."  Stross' article contains the best single articulation as to why smart cards (and EMV) have not caught in the United States to date (the article reviews failed initiatives by Target and American Express).  Money quote:

When I spoke with Jim McCarthy, a senior Visa executive overseeing global products, I heard some good reasons for the early adoption of smart cards in Europe and the slow adoption by Americans. In Europe, telecommunication costs in the 1980s were prohibitively high. Purchase authorizations couldn’t be done on the spot. So security was built into the card itself, or, as he put it, “moved out to the edge of the network.”

But in the United States, magnetic-stripe cards could connect to very smart mainframes at the time of a purchase. These machines conduct fraud analysis in real time. By keeping cards dumb and security centralized, the company can easily upgrade its central system at any time; changes take effect throughout the network instantaneously. Visa has 686 million cards circulating in the United States; if all were smart cards, each would have to be replaced when it made some kinds of security upgrades, Mr. McCarthy says.

That same edition of the New York Times has a nice profile of MasterCard's new chief executive, Ajay Banga.  There's some excellent reporting here by Times reporters Vikas Bajaj and Andrew Martin, who've filed their report from Mumbai as Banga flies in as sort of a 'return of the conquering hero' type event.  Bajaj and and Martin note that "[Banga's] globe-trotting identity and animated personality are in jarring contrast to previous MasterCard chief executives, who were typically buttoned up, American and, often, Ivy League-educated." 

My thought is that Banga's wide deviance from that model isn't mere symbolism:  this must be one seriously talented guy.  A friend from his Citigroup days confirms that:

[Dinyar] Devitre says he believes the fact that Mr. Banga is a Sikh has ultimately worked to his advantage, despite an occasional uncomfortable glance or comment. He says it takes a lot of conviction to wear a turban, a central tenet of Sikhism, at an American-based corporation. “People look at him and say: ‘He wears a turban and he made it to the top. He must be extraordinarily gifted.’ ”

In a third article, AP Personal Finance writer Candace Choi "lived without a bank [for one month] and instead relied on check cashing, money orders and prepaid cards."  My local daily (the Dallas Morning News) published this story with the headline "Fees, confusion come with going bankless."   Yahoo Finance went with "Living without a bank: Fees and confusion galore." 

How did Choi's experiment go?  She wastes no time with her assessment - here are her opening lines:

The nickel-and-diming never stopped.

The fees were constant: $28 to cash a paycheck. $1.50 for a money order. A dollar or more every time I swiped the prepaid cash card I bought at the drug store.

In all, I racked up $93 in fees in a monthlong experiment of living without a bank and making a go of it on the economic fringe. That works out to $1,100 a year just to spend my own money.

Choi's recounting is generating a lot of heat in the YF comments section - there are 2,269 entries as I write this post.  I encourage you to read through the comments to get a feel for the debate.

In a fourth article, The Wall Street Journal's Jennifer Waters has an informative piece entitled "Watch Out for ATM Skimming."  The Dallas Morning News picked up Ms. Waters' story through Dow Jones Newswire and published it with some nice graphics from The San Jose Mercury News that detail "how debit card skimming works."  [Included among the depictions is a rendition of the PIN pad device swap that has nailed ALDI and others.]

I'm having trouble locating those graphics online, but the WSJ has something even better: a video that accompanies the article features an interview with MagTek's Chief Security Officer, Robert Patterson.  Patterson's presence here is purely educational for the layperson.  But industry insiders know of MagTek's good efforts to promulgate point-to-point encryption ('P2PE') schemes through their MageSafe Card Readers and MagnePrint card authentication technology.

Comments

[Mitch Green]

Hi Andy,

Nice post, I am not sure I entirely agree with all of the well-written article by Randall Stross.

I think the issue of fraud and particularly skimming is potentially being underestimated, the experience in Australia is that skimming is becoming more frequent and much more sophisticated which is one of the key reasons we are moving to EMV.

The real issue which I think needs to be solved is non-repudiation of a transaction which is always going to be a challenge with magnetic stripe technology and whilst I am not at all convinced EMV will solve this in its entirety, I am convinced it (or a similar or perhaps more sophisticated technology) is a step in the right direction.

Cost-benefit has always been a difficult challenge for chip cards and the search continues for the "killer app" which will mean consumers/merchants demand chip technology be introduced.

In reality I think we will ultimately see a combination of chip technology and mobile phone technology to solve the issues but even then it will take a long period of time and the costs will be substantial.

Just look at how long it took the airline industry to move to electronic ticketing or perhaps more relevantly how many paper vouchers are still being used in the payments industry.

Anyway as I said at the beginning of this long and rambling comment, nice post and keep up the good work!

Kind regards,

Mitch.

[Andy]

Thanks for the great insights, Mitch!