US Bankcard Services Industry Blog

Tuesday, October 25, 2011

Smart Credit Cards: Science Fact or Sicence Fiction?

What is all the commotion about? There is another new kid on th processing block….may I present Dynamics. They have raised $35 million in funding to accelerate its business of making computerized smartcards and payment systems for the card processing industry. In the U.S., most credit cards use magnetic stripes that are read by 1970s-era card readers. Dynamics uses those same magnetic-stripe readers, but it has features built into the plastic of its Card 2.0 credit cards that enable more innovative features without requiring a multibillion-dollar upgrade in the payments infrastructure.

Above: Dynamics Multi-account Card

Dynamics is transporting old-fashioned magnetic strip credit cards into the modern computer age. For instance, as you can see in the top image, at a merchant location the cardholder can press a button on the card in order to switch it from a credit card to a debit card or vice versa. This “multi-account” card can rewrite the numbers on the magnetic stripe as needed. That allows credit card issuers — who spend $20 billion a year on marketing — to truly differentiate themselves from the rest of the pack according to Jeff Mullen founder of Dynamics.

Citibank is its first major customer to other credit card issuers. And is also preparing to expand beyond local territories, but it is also working to expand into new markets around the world, including the contact-chip card market in Europe, the radio frequency identification (RFID) card market in Asia, and the phone-based payment systems that are beginning to launch with smartphones…maybe even Google’s digital wallet. Dynamics I being innovative in payments and be agnostic about the platforms. Dynamics has made the 40-year business model cycles at card issuers are turning into 3-year business model cycles.

Dynamics hopes to upgrade magnetic stripe cards to computerized smartcards with better fraud security and multiple accounts per card — without making any changes to the existing infrastructure of magnetic stripe readers in 60 million locations. The ultimate goal isn’t just to upgrade credit-card technology. It’s to transform the existing credit-card business, with cookie-cutter cards and offers, into ones where consumers can give voice to their needs and banks can respond with personally customized offers.

The development could be very significant for credit-card issuing banks that have wanted to upgrade their service to engage and reward customers, only to be stymied by the limitations of magnetic-stripe cards. Every bank aims to be “top of wallet,” which is the card that a person will use for 70 percent or more of their transactions. The second card down will likely be used only 15 percent of the time, and the third card, 5 percent. If a bank can offer better rewards, make a card more secure, or otherwise convince someone to use a card more often, the financial gains can be enormous over the life of the customer relationship and this segues into the merchants pocket…less fraud means less money loss.

Each ultra-thin card has 70 electronic components and can be modified on the fly. That means the company can change the numbers that are fed to the magnetic-stripe reader. For instance, if you press a button on one of Dynamic’s cards, it will switch from one credit card number to a different one (and change the indicator light so you know which account is active). You can thus have multiple credit-card accounts from one bank, such as a personal account and a business account. The purchase is processed on Visa, MasterCard, or other card networks as a card transaction. Another type of card can offer improved security. Instead of a full 16-digit credit-card number, the numbers are interrupted by a display. The display will show the remaining numbers in the account only after the user types in a PIN code on a set of five small buttons on the surface of the card. If a card is lost, a thief can’t use it at all unless he or she knows the PIN code. If the result is fewer fraudulent transactions, then the banks can see improved profits. A programmable card fits with the strategies of a lot of banks, which are issuing different cards for loyalty programs or budget management. Wow!… NFC, RFID, EMV…science, technology and card payments are coming together en force.

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