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Sunday, March 20, 2011

IBM’s 100 Icons of Progress - Magnetic Stripe Technology


Some elements of everyday life are so deeply engrained that it’s hard to imagine how we coped before they existed. For many individuals born after 1970, that’s true of the magnetic stripe on credit and debit cards. People around the world swipe their cards through “mag stripe” readers more than 50 billion times a year. What they don’t realize is what a major shift this seemingly simple technology represented for retail, transportation and daily life.

As recently as the early 1970s, credit-card transactions were more physical than digital. Each one was recorded by using what was essentially a tiny printing press to imprint the raised letters and numbers from a card onto a two-sheet, pressure-sensitive paper form. One of those sheets was then sent to a processing center, where a harried clerk would type the account and sales information into a computing system. The system was insecure, slow and prone to error.

The magnetic stripe, when combined with point-of-sale devices, data networks and transaction-processing computers, was the catalyst that accelerated the proliferation of the global credit card industry, which now handles US$6 trillion in transactions per year. Initially used on transit tickets for the London underground and California’s Bay Area Rapid Transit system, the magnetic stripe enabled a person’s identifying information to be logged and transmitted immediately, securely and accurately. The technology is now commonplace on ID cards, drivers’ licenses, security control cards and ATM cards.

“Why has the mag stripe proved so resilient?” writes David S. Evans, co-author of the book Paying With Plastic: The Digital Revolution in Buying and Borrowing. “I think the answer is simple. It is really inexpensive to issue mag stripe cards, and nowadays the point-of-sale technology for reading mag stripes has been perfected and benefits from economies of learning and scale.”

The first person to affix magnetic media to a plastic card for data storage was IBM engineer Forrest Parry. This was back in the early 1960s. The story goes that he wanted to combine a strip of magnetized tape with a plastic identity card for officials of the CIA, and he couldn’t figure out how to do it. When he mentioned his problem to his wife, who happened to be ironing clothing at the time, she suggested that he use the iron to essentially melt the strip on. And that’s what he did. IBM became a pioneer in magnetic stripe technology.

The story of the magnetic stripe isn’t just about the ingenuity of the technology. Even more important was the effort by IBM and other leaders of electronic payments to create open compatibility standards. Working with the banking and airlines industries, IBM helped develop the approach that was adopted as a U.S. standard in 1969 and an international standard two years later. That meant that anybody could use their magnetic stripe credit or debit card anywhere in the world.

It also meant that IBM couldn’t benefit directly from its magnetic stripe inventions. “We decided not to patent the stripe or the stripe production technologies. We wanted everybody to use them,” says Jerome Svigals, IBM’s magnetic stripe project manager in the 1960s and early ‘70s. But IBM was compensated, just the same. “For every buck we spent on developing the mag stripe, we got [US]$1500 back in computer sales,” Svigals says. “Our motive was to drive computer sales, and we did.”

At first, banks were slow to adopt the magnetic stripe. Cost was a deterrent. IBM argued that prices would come down as production volumes increased. Svigals made a presentation to IBM’s board of directors, which included several bankers. He told them that IBM had no plan to get into the credit card business itself. It would just supply the technology. Svigals recalls that at the end of the meeting, then chief executive Thomas J. Watson Jr. took him aside and confided that he wasn’t totally comfortable with the magnetic stripe strategy. The reason: “Mom doesn’t like credit cards,” he confided. IBM got into the business anyway.

These days, in an increasingly instrumented and interconnected world, the job performed by magnetic stripes can be done in other ways. Cards embedded with microchips are rapidly replacing magnetic stripe cards in Europe and other developed economies. And mobile phones are poised to become another important means of making purchases. But the global financial and transaction systems into which they plug are in many ways a legacy of the humble magnetic stripe. One could say that the magnetic stripe did for consumers and travelers what the bar code and Universal Product Code (UPC) did for inventories and supply chains. Quite a legacy for Mrs. Parry’s ironing board.


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