Sunday, June 17, 2018
Business

How does the Florida man who patented the magnetic strip feel about the chip card?

Ron Klein had a role in creating one of finance's most influential innovations, one that changed the way Americans think about and spend their money.

Inside his wallet is a piece of technology that threatens to replace that innovation.

Klein, 80, of Sarasota had a hand in inventing the magnetic strip on the back of credit cards. He recorded the idea in a patent application 50 years ago, in April 1966.

Today's cards are packed with more data than Klein's prototypes, but the technology is more or less the same, long outliving the reel-to-reel tapes that inspired it.

"It was a very simple approach," Klein said. "You question yourself: How in the world did it — in this world of obsolescence — did it survive from 1966?"

A half-century later, magnetic strips are only just being phased out, transforming a system that transfers trillions of dollars each year. Banks have been issuing new chip cards, retailers are installing new readers and Americans are getting used to dipping their cards at checkout instead of swiping them.

The change is necessary, the industry says: The magnetic strip is being abused by criminals, who can use skimming devices to furtively record the information it contains or make counterfeit cards that work in stores. The new embedded computer chips make that task harder and could cut fraud substantially.

• • •

Back in the '60s, before the credit card industry was the behemoth it is today and before credit card fraud became an industry worth billions in its own right, Klein was worried about a different set of issues.

Fraud in those days was largely handled by a low-tech process. As Klein tells it, credit card issuers sent retailers a book each month with thousands of bad numbers, and at checkout, cashiers made sure customers' cards were okay to use by thumbing through the list and looking for a match.

It was a slow process that made for long lines at the holidays.

So working for department store clients like Macy's, Klein, then working in Philadelphia, figured a computer system that would let salespeople key in credit card numbers and speed the process. And it could move even faster if the computer could somehow read the card number.

"I said, 'Wouldn't it be nice if I could put a little bit of intelligence and smarts in that piece of plastic?' " Klein said.

He considered a punch card system that hearkened to the earliest days of computing, but manufacturers told him it would be too costly to make. So he toyed with the idea of embedding the data into a strip of reel-to-reel tape. It worked.

His patent, awarded in 1969, includes plans for a "tape reader" to pick up card numbers.

Around the same time, a team at IBM had a similar idea. The team was looking for a technology that could speed credit card sales and digitize plane tickets.

It tried bar codes and a punch-card system, according to a 2012 article by Jerome Svigals, who led the team. But like Klein, IBM's engineers eventually settled on the magnetic strip.

Unlike him, the team did not patent it. Figuring that the company would make more money selling computers if the cards became widespread, IBM released the technology for free. Today, that team is widely credited with the invention.

Klein says he's not sure why his employer at the time, Ultronic Systems Corp., didn't enforce the patent, but he left to start his own company before it was awarded. Meantime, IBM's gambit paid off.

"The strategy worked beyond anyone's dreams," Svigals wrote in the trade magazine IEEE Spectrum. "By 1990, every dollar IBM had spent developing the strip technology had returned US $1500 in computer sales."

• • •

Whoever gets credit for the magnetic strip, there's little doubt about the impact it has had on the U.S. economy.

The ease of swiping a card instead of carrying cash made debit and credit cards appealing, and the technology became inexpensive enough that it could be distributed widely. Credit card companies and merchants could stop processing each transaction by hand.

"It really enabled the entire process to be automated, and without the possibility of automating it, it was far more costly and cumbersome," said Lewis Mandell, author of The Credit Card Industry: A History. "So the mag stripe helped enable the mass dissemination of credit cards."

In turn, the rise of cards has changed how we think about money. Cards are used to make a staggering number of purchases, and they've contributed to the rise of Americans' consumer debt, which has swelled to $3.5 trillion in outstanding loans.

Bank cards were used in 82.3 billion transactions in the United States in 2012, according to a Federal Reserve study. Altogether, $4.5 trillion changed hands that year using credit, debit and prepaid cards.

• • •

With enormous sums of money come enormous temptation for criminals.

Fraudsters made 28.7 million unauthorized charges in 2012, totalling $4 billion. That works out to more than $8 for every $10,000 Americans spent using cards.

Making their work easier: The technology embedded in each card hasn't changed much since Klein and IBM first thought up the magnetic strips.

Credit card companies have developed sophisticated computer systems to flag suspicious charges, but the cards in Americans' wallets are still vulnerable to skimmers on ATMs and gas pumps, and it's still fairly easy for criminals to make copies if they can get a card's information.

"If the criminal can obtain the data they can make clone cards that behave exactly like the original," said Jeremy King, international director of the PCI Security Standards Council, which sets global standards.

And while chip cards can't guard against fraudulent purchases made online, they don't hold static data, making them "virtually impossible" to counterfeit and use in person, King said in an email.

• • •

For his part, Klein says he has his qualms about the new chip cards. Introducing more electronics, he figures, introduces the possibility for fraud. Complicating an otherwise simple product makes it easier for something to go wrong.

"It's not the way I would have done it," he says, "but that doesn't mean I'm going to fight the system."

These days, Klein works as an adviser and motivational speaker, telling stories from his long career as an entrepreneur and inventor that he says he hopes will inspire young people.

In the decades after he developed the credit card strip, he went on to develop Multiple Listing Service technology for real estate agents and a real-time quote system for the bond market, and he founded a handful of companies. He was awarded a patent a few years back for a device meant to help the blind. He's tried to retire a few times, but it doesn't seem to stick.

So Klein has moved on from the magnetic strip.

The world of finance has, too.

Ingenuity is a series of occasional features about local people with creative ideas. If you or someone you know could be a future subject for this feature, contact business reporter Thad Moore at [email protected] Follow @thadmoore.

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