The black, magnetic stripe on the back of credit cards has been an integral part of the payment method since it was introduced by IBM way back in the early 1970s. But its time in the sun is ending.
By the time the mid-1990s rolled around, the financial services industry realized the mag stripe method wasn’t as secure as it should be, and work on the Europay MasterCard Visa (EMV) chip-based standard was started. It was implemented in Europe and other parts of the world in the early 2000s, and counterfeiting and fraud sank dramatically in those places.
The U.S. is on track to roll out chip-based cards next year, so we spoke with Carolyn Balfany, group head for U.S. product delivery for MasterCard, to get a better understanding of how the rollout would affect payment security, the financial services industry and consumer habits.
BALFANY: I think the difference is that it’s become a broader conversation. The [EMV] migration was very much an industry discussion. There was lots of work being done and lots of railroad tracks being laid. Breaches brought it to more of a broad dialogue with media and consumers.
BALFANY: What we’ve really been doing to adapt to this evolving threat is also layering in other solutions. So continuing to employ solutions that have been in place for a while. This is a cumulative effort, not a silver bullet. Chip doesn’t solve everything. So the fraud systems and the neural networks are still running and are quite effective at mitigating fraud. You layer chip on that and it secures your face-to-face or your in-person transactions.
We’ve also recently introduced, as one solution to be deployed in the online environment, the idea of tokenization. The idea of tokenization is one strategy that will be employed to enable both devices and online transactions. The concept is that we’ll replace what you know as the card number with another number — i.e., the token. That token will allow us to understand the channel in which that token should be present. So if we put the token on your mobile device, then we’d expect transactions to be on that specific channel in those situations.
Or tokens can be used for online transactions where there’s cards on file. That can be replaced with a specific token. So you can understand quickly how we’d have a view into context, so if that token were to show up in a store, we’d know immediately that that’s problematic.
BALFANY: The extent of the changes really that consumers should expect to see is really about just the way chips [are] used differently at the point of sale. So instead of swiping your card, you insert your card and you leave it in the terminal for the duration of the transaction. So that’s different from what we do today. But really, all of these other solutions that we’re talking about layering have almost no impact on the end consumer; they're happening behind the scenes. Which is a great thing, because we’re not trying [to] retrain millions of consumers.
BALFANY: What chip does is it reduces counterfeit fraud. But it reduces counterfeit fraud by a profound rate. I mean, 60, 70, 80 percent drops in fraud.
BALFANY: MasterCard’s projection is that half of the U.S. consumers will have chip-enabled cards by the end of 2015. Very similarly on the merchant side, we think about half of all the terminals will be chip-enabled within that same timeframe. It’ll continue on for the next two to three years after that, until we’re virtually at 100 percent. Because it isn’t a mandate, you may still have some mom-and-pop stores that still have magnetic stripe-only terminals.
We really think that [the] U.S. is gonna sort of evenly become enabled. If you think about these other markets, really from the time they meaningful started rolling out cards and terminals to their peak or current state, they would range over six and seven and eight years.
The U.S. is gonna do this in something like four. So it is faster than other markets.
BALFANY: We’ve obviously played a key role in creating the enablement systems to make solutions like Apple Pay, but not exclusive to Apple Pay, work. MasterCard has a whole program called the MasterCard Digital Enablement System, which actually enables mobile solutions and creates the tokens that can go onto those mobile devices.
From the beginning, we said, the move to the chip is the foundation for the next generation of payments, and Apple Pay is a terrific proof point for that now. What Apple Pay effectively is, and what those mobile transactions are, are chip-grade transactions. So it’s really important for the consumers to know that the same level of security that is enjoyed in a chip transaction when you insert your card, the same technology is being used when an Apple Pay transaction is created.
BALFANY: Exactly. I think it’s terrific that we can explain that security to cardholders. I think consumers as a whole are really starting to understand the benefit of the chip, so us being able to say it’s the same level of security can be very powerful and very reassuring.