Understanding Magnetic Strip on Credit Cards: History, Security Risks, and Future

The magnetic strip on credit cards has been a staple of payment technology for decades. It was first introduced in the 1960s by the Bank of California.

The magnetic strip, also known as a magstripe, is a thin strip of magnetic material that stores the cardholder's account information. This information is encoded in a format that can be read by a magnetic reader.

The magnetic strip is vulnerable to data breaches, which can compromise sensitive information. In 2013, a massive data breach at Target Corporation exposed the credit card information of over 40 million customers.

To protect against data breaches, credit card companies have implemented various security measures, such as encryption and tokenization.

The magnetic strip on credit cards has a fascinating history. Fritz Pfeulmer, a German engineer, is credited with the basic concept of using coated magnetic stripes to store data in the 1920s.

This concept led to the development of magnetic recording tape. The magnetic stripe card didn't come along until the 1960s, when Forrest Parry, an American engineer at IBM, created it by combining a strip of magnetized tape with a plastic identity card.

Forrest Parry's solution was inspired by his wife, who suggested using an iron to melt the strip onto the card. This simple yet effective approach paved the way for the magnetic strip on credit cards.

American Express introduced credit cards with magnetic stripes in 1970, marking the beginning of a new era in payment technology. The technology quickly gained traction with other issuers over the next decade.

Magnetic strips on credit cards are made of plastic or durable paper, about 2 inches by 3 inches in size, and contain a stripe with iron particles in plastic film that holds the embedded data.

The data on the magnetic strip is encoded when a solenoid, a coil wound into a tightly packed helix, magnetizes the tiny iron-based particles in different directions. This device produces a strong magnetic field when a current is passed through it.

The magnetic strip contains three horizontally stacked tracks, each capable of holding a different amount and type of data, including the cardholder's name and account number, the card's expiration date, and a service code.

Before magnetic strips, credit cards didn't even have them. Business owners took an imprint of embossed account numbers on carbon copy paper.

This practice has obvious safety reasons for being phased out. All it takes is one unscrupulous employee or customer to steal a credit card number imprint left on the counter.

The first credit cards were not actually cards, but cuneiform tablets used by Sumerian merchants. They were used to keep track of accounts and shipments, but are now mostly valuable as antiques.

Paper loyalty cards were also used in the 19th century. Customers would show their cards and run up a tab that was settled at the end of the month.

Even bartenders used to collect paper loyalty cards before letting customers run up a tab. This practice has largely fallen out of vogue.

Magnetic stripe cards are usually made of plastic or durable paper and are about 2 inches by 3 inches in size.

The magnetic stripe on a credit card contains three horizontally stacked tracks, each of which stretches across the full width of the card and occupies a portion of the magnetic stripe.

Each track is capable of holding a different amount and type of data, including the cardholder's name and account number, the card's expiration date, a service code, and a card verification code.

Credit cards primarily or exclusively use the first two tracks, while the third track sometimes contains additional information such as a country code or currency code.

The tiny iron-based particles that make up the magnetic stripe can be magnetized in different directions by a device that produces a strong magnetic field, which is a solenoid.

A solenoid is basically a coil wound into a tightly packed helix, with a high-permeability, metallic core that produces a strong magnetic field when a current is passed through it.

The magnetic strip on a card can be 'written' or encoded with information by magnetizing the iron-based particles in different directions.

If the magnetic stripe becomes dirty, scratched, or demagnetized, the card may not work.

A magnetic stripe reader works by inducing a voltage in the coils of the card reader device when a card with a magnetic strip is moved back and forth over the 'reader head'.

This voltage can be amplified and recorded electronically, which is finally read by a computer to authenticate a user or a transaction.

Legacy credit cards with a magnetic stripe work by swiping the card, which captures the magnetic fields and reads the card data, sending it for payment processing.

Reading magnetic card data is straightforward, making it easy for criminals to create counterfeit cards once they have a credit card number.

EMV chip cards use a unique, encrypted digital signature that changes with each transaction, unlike magnetic stripes where the information never changes. This makes EMV cards inherently more secure.

EMV stands for Europay, Mastercard, and Visa, the companies that were involved in the creation of the technology standards. This technology has been around for a while, with the first EMV cards being introduced in the 1990s.

EMV cards require the user to sign for the transaction or input a PIN number into the card reader at the point of sale, adding an extra layer of security.

EMV chip cards use dynamic, encrypted data, making it much harder for them to become subject to fraudulent transactions.

This technology is a significant improvement over magnetic stripe cards, which collect static data.

Card networks have asked merchants to switch over to EMV chip cards because they are more secure.

In fact, Visa found that counterfeit fraud dropped 76% from 2015 to 2018 when EMV chip cards were introduced at a larger scale in the U.S.

EMV transactions are a more secure way of processing payments compared to magnetic strip transactions.

Magnetic strip transactions involve the collection of static data, which makes them vulnerable to fraudulent activities.

Chip card transactions, on the other hand, involve dynamic, encrypted data, making it harder for thieves to intercept sensitive information.

Card networks have asked merchants to switch to EMV transactions due to the increased security benefits.

Visa found that counterfeit fraud dropped 76% from 2015 to 2018 when EMV chip cards were introduced at a larger scale in the US.

EMV transactions are becoming the norm, with most up-to-date card terminals accepting EMV payments.

Upgrading to EMV readers can enhance the checkout process and provide customers with more payment options.

Magnetic stripes are less secure and pose a risk to merchants and their customers.

Credit cards still contain magnetic stripes, but the card brands will soon eliminate them altogether.

Magnetic stripes will be phased out in 2024 and fully discontinued by 2033.

Upgrading to EMV readers helps merchants stay current with evolving payment technology and consumer trends.

EMV terminals improve efficiency, increase security, and boost profitability.

A major security issue with magnetic strip transactions is that there is no way to individualize a transaction, making it easier for thieves to intercept sensitive information.

In magnetic strip transactions, the card is swiped at the POS terminal, and the POS terminal reads information off the tracks on the strip.

Magnetic strips are being replaced by EMV chips in credit and debit cards. These chips contain the same information as magnetic strips but are inherently more secure.

The EMV chip uses a unique, encrypted digital signature that changes with each transaction, unlike magnetic strips, where the information never changes. This makes it much harder for thieves to use the information for new transactions.

EMV cards may require the user to sign for the transaction or input a PIN number into the card reader at the point of sale. For online transactions, a three- or four-digit number called a CVV (for card verification value) or CID (for card identification) code is used, which is both encrypted in the chip and printed on the card.

Some merchants have been reluctant to replace their old card readers with new chip-enabled ones due to the costs involved. However, upgrading to EMV readers can significantly reduce liability and chargeback risk, making it a long-term investment with tangible ROI.

Magnetic stripes will be gradually phased out in 2024 and then full discontinuation by 2033. Most up-to-date card terminals already accept EMV payments, and many EMV card reading terminals also have NFC capabilities for contactless payments.

Upgrading your payment terminals to read EMV and NFC payment cards can enhance the checkout process and provide customers with more payment options. Contactless payments are becoming increasingly popular, and having the right equipment can help you stay ahead of the curve.

Mastercard has announced that by 2029, no new Mastercard credit or debit cards will be issued with a magnetic stripe. This means that magnetic strips will eventually disappear from new credit and debit cards.

Magnetic stripe cards have been targets for fraud since their introduction.

Skimming is a common method used by criminals to steal card information. They place an inconspicuous device called a skimmer on card readers, which reads the information on the stripe and stores it for later retrieval.

The FBI estimates that skimming costs financial institutions and consumers more than $1 billion a year.

Using swipe or keyed transactions as a fallback method when chip readers fail can be a problem. Merchants are generally liable for any fraud that occurs with these types of transactions.

If a merchant chooses to key in a transaction or swipe, they should take extra precautions to minimize the risk of fraud. This is especially true for large purchases.

Running a transaction through a fallback method with no fraud protection may not be worth the risk, especially if the customer is unknown. This is because the merchant may be held responsible for any resulting fraud.

In some cases, like a regular customer having trouble with their chip card at a local restaurant, using a fallback method may not be a big deal. However, in other situations, it's best to err on the side of caution.

Magnetic stripe cards have been targets for fraud since their introduction, in particular through a process known as skimming.

Skimming involves placing an inconspicuous device called a skimmer on the card readers of gas pumps or ATMs, which reads the information on the stripe and stores it for later retrieval by the criminals.

The FBI estimates that skimming costs financial institutions and consumers more than $1 billion a year.

Criminals use the stolen information to create duplicate cards, which they can then use to run up charges on the person's credit card or drain the money from the bank account that's linked to a debit card.

This type of hacking is a serious security risk that affects many people.