High(er) Tech Credit Cards

Last week I wrote about credit card technology, in particular the “chip and PIN” or “smart” cards that Europeans have been using for decades. I said that although the technology used by European (and Canadian, it turns out) cards is unquestionably more sophisticated than the dumb old plastic we simpleDynamics--Citi--Dividend2G--300dpi--Photo--(C)2010 Crop Americans carry, it is not particularly “smart.” The only meaningful advantage is in fighting fraud, but that problem has such a tiny economic impact that it is hard to imagine how upgrading from our current swiping system could possibly make sense.

Indeed, I still do not understand how adopting chip and PIN makes economic sense outside the USA. I can understand it making psychological sense. Everybody seems to have an irrationally exaggerated fear of credit card fraud. And there is no discounting the cool factor: the natural human attraction to new technology.

Speaking of which, two readers pointed me to a New York Times blog entry posted two days later on even higher tech cards now in the pipeline.

These new cards, now being tested by Citi, communicate with the outside world via the good old magnetic stripe reader, but have chips inside as well as buttons and displays. They are the same size as conventional cards and run on a battery that should last well past the normal card expiration date. Cool.

Citi’s version (photo above) allows you to pay for some things using cash-back reward points. Just press the little R button before swiping. If you don’t have enough points the purchase will go through as a regular charge. (I found the picture and attached press release via a Wired blog, which promised several features that the Citi card does not actually have, including the ability to replace multiple store cards and to have your new balance “written back to the strip” by the card reader, which I am pretty sure is not physically possible.)

How cool is the Citi card? I’m not sure. You could just as easily announce in a clear voice that “I am paying for this with points” as you swipe your card and then apply the points to your balance when you pay the bill at the end of the month. Still, the card has these cool little lights on it. And buttons.

I think it tells us a lot that the first implementation of this undoubtedly nifty technology has so little practical benefit. The company that developed it, Dynamics Inc., has another product that sounds like an anti-fraud killer app. Not only does a user have to key in a PIN to get the magnetic strip to work, the account number is not otherwise visible on the front. Too bad nobody really cares.

A more attractive application is the multi-account card. In theory, you would only need one physical card which, by pressing a few buttons, could be swiped for any of your many accounts. That is actually useful, but I foresee two big issues.

First, in order to get your Capital One and Wells Fargo accounts on the same card, the major card issuers will cooperate on this, and the probability of that is just about nil. (And cloning the cards without their permission is unlikely to be allowed.)

Second, although reducing four or five cards down to one is nice, it is far short of the benefit of reducing four or five cards down to zero. That is the promise of so-called electronic wallet schemes, and although nobody has quite worked out the details yet, I think this is the way the world is going. After all, carrying these little plastic tokens representing each of our accounts is a bit archaic. All we need is some way to give the right account numbers and codes to the merchant at check-out. If only we could get everybody to carry small multi-band radio transmitters. Ideally, those transmitters would carry a chip with a unique identification code and would be capable of running simple computer programs.

I am not ready to pronounce this technology dead. A card with buttons, lights, a display, and a dynamic magnetic strip really is cool. A friend of mine who works with similar things tells me that it should cost $6-$8 to make. If Citi offers it to customers for $10, I am sure they will sell more than a few. And I could see banks offering a selectable credit/debit card for a similar amount and getting a few takers.

But this will be a niche market for nifty coolness, not a game-changing improvement in how cards work. Of course, simple coolness can go a long way. Just ask Steve Jobs.

[Photo – Dynamics, Inc.]

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