Episode 695: Put A Chip On It : Planet Money Credit cards with chips in them have been around for four decades. So why is America only getting them now? And now that they are here, why are so few places using them?

Episode 695: Put A Chip On It

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In the mid-'60s, the airline industry had a problem. It wasn't the planes. The planes were awesome. In fact, the 747, the first real jumbo jet had just been introduced. There were more passengers at the airport than ever.


And that was the problem. More passengers meant longer lines. This was the era when you paid for your ticket right there at the airport.

JEROME SVIGALS: Now that was sort of a slow cumbersome process.

GOLDMARK: This is Jerome Svigals. He worked for IBM at the time. And remember, it's 50 years ago. So when you walk up to the counter and you give them your credit card, your credit card is just plastic rectangle. It's got your name on it and some numbers.

SMITH: So nice and elegant, but that simplicity made it a hassle because you'd have to hand your credit card to the ticket agent, and then you'd wait.

SVIGALS: Somebody dials the telephone, calls the bank, asks for the clerk, the clerk asks for the account number. This is all done manually.

SMITH: And it is just as tedious as it sounds.

GOLDMARK: So the airlines, they wanted something faster. And they come to IBM and say, what do you got? Svigals goes and assembles his team of Ph.D. types, and they have to try and figure out how to take all of that information in that telephone call and put it on the card itself in a way that a machine could understand. They tried bar codes. They tried something with metal particles that I didn't really understand. And the eventual solution, which I personally like as a radio producer, a strip of magnetic cassette tape.

SVIGALS: Our first cards were actually pieces of audio tape wrapped around the cardboard to simulate the bank card.

GOLDMARK: Meaning that, like, you took apart an audiotape and stapled it to a piece of cardboard.

SVIGALS: We just basically cut off a length of audiotape and Scotch-taped it to the card (laughter). It was essentially how we did it.

SMITH: They called it the mag stripe because it is a stripe of magnetic tape all the way across the back.

GOLDMARK: Svigals knew he had a winner. But he needed to prove it before anybody else would take this leap and trust him, right? So he talks American Express into issuing these fancy new mag stripe cards. And then he needs a place to test it. So he gets American Airlines to set up a kiosk in Chicago O'Hare Airport, and then they watch.

SVIGALS: It rolled out very, very well. It was exceptionally successful.

SMITH: In fact, people would come from one end of the airport, walk all the way to the other end of the terminal just to use the machine because it was quicker than standing in line.

GOLDMARK: Other airlines saw this, other banks saw this, and they were like, I want one of those. Give me a magnetic stripe on my cards. Give me that machine.

SMITH: And a legend was born, the credit card swipe. It was fast, it was convenient, and it was also a gold-plated invite to criminals everywhere to copy this card.


SMITH: Hello, and welcome to PLANET MONEY. I'm Robert Smith here with our senior producer.

GOLDMARK: Alex Goldmark.

SMITH: Today on the show, the history of the credit card is the history of this sort of battle. Every time a credit card maker tries to put something on it to make it more convenient like an audio strip, then a criminal figures out how to crack it and take your money. It's a war of convenience versus security.

GOLDMARK: For four decades, there has been a more secure option than the magnetic stripe. It is that little square computer chip that is landing on your credit cards right now. Why did it take us so long to get it, and why now that it's here is nobody using it?

SMITH: Maybe because it's super slow and annoying. Anyway, today a quick history of what's in your pocket.


SMITH: The mag stripe, that little piece of audiotape on the back of your credit cards, it has been around for decades, same as it ever was. And in fact, you can take any card out of your wallet that has a mag stripe, and you can actually play it. It's audiotape. It is still audiotape.


GOLDMARK: Yup, we just took scissors, cut out the magnetic stripe and ran it through one of the old tape machines here in the studio.


GOLDMARK: It sounds like aliens trying to make contact.

SMITH: (Laughter) On our credit cards, and, you know, this little strip of audiotape, I consider this the original sin of the credit card industry. It was the first time they said, oh, we want these things to be fast and convenient for everybody. But since then this strip has cursed us because, you know, if you've ever made a cassette bootleg, it is incredibly easy to copy audiotape, so easy you can learn how to fake a credit card in about 90 seconds on YouTube.


UNIDENTIFIED MAN: All we have to do, toss the cassette into the boom box. Click record.

SMITH: So because the magnetic strip was so easy to copy, what credit card companies started to do was to add things to your credit card. Bring out your credit card now. I get one of these in the mail, like, every three months. And every time I look at it, they have added some sort of security feature to make up for the original sin of the magnetic stripe. They added a little number, a special security code on the back, oh, and the hologram, you know, hologram of a bird. Nobody ever looks at it. Some of these cards have your picture on it. And the newest thing to combat fraud, that computer chip. Mine is silver, about the size of my thumbnail. And this, this is the thing that is supposed to save us all from fraud in theory. For the history of this little chip, we brought in Julia Longoria from WNYC. She originally did this story for the Money Talking podcast. Hey, Julia.


SMITH: And you found out that this thing that seems super new and high-tech has been around for decades, decades. And you tracked down the guy who invented it.

LONGORIA: That's right. He wrote the patent in the '70s. But he's actually dead now. So I tracked down someone who worked with him in France, and I called him up.

MARC LASSUS: Hello? Hello?

LONGORIA: (Laughter) Yes, so can you go ahead and introduce yourself?

LASSUS: Well, I'm a genius.

SMITH: He's a genius. I'm going to answer the phone that way.

LONGORIA: This is Marc Lassus, and he is an engineer.

LASSUS: I went to a Ph.D. as well.

SMITH: He's a doctor.

LONGORIA: And Marc says the man who invented the chip was named Roland Moreno, who was a colorful guy at a colorful time.

LASSUS: You know, it's the generation having some marijuana (laughter). I think some - oh, (unintelligible).

LONGORIA: Are you thinking of hippies?

LASSUS: Hippies, yes.

SMITH: I knew we should never let hippies near credit cards.

LONGORIA: Not only was he a hippie, he was also a comedian and a freelance journalist. And he liked to hang out at places like Motorola with the electrical engineers there. And all the engineers would talk about this big problem France was having at the time, credit card fraud.

LASSUS: We were trained to make very secure device, essentially to avoid the fraud.

SMITH: Fraud, there was a ridiculous inordinate amount of fraud in France at the time. And the reason for this is that the French phone lines kind of sucked.

LONGORIA: And phone lines are important because when you swipe a credit card, what's happening behind the scenes is the machine is calling over a phone line to the bank to get the OK to make sure the card is legit.

SMITH: But in France, sometimes these calls wouldn't go through. And each call was expensive. So what the French store owners would do is they would wait until the very end of the day after taking credit cards all day long and then they would make one call for all the purchases at the end of the day.

LONGORIA: And you don't have to be a criminal to figure out how you can take advantage of this.

SMITH: No, you get up early. You make a fake card. You show up at the store. Buy something at 9 o'clock in the morning, Hermes bag. And by the time they make the security phone call at the end of the day, you're gone. You're halfway to Marseille, and they can never catch you.

LONGORIA: So, Roland Moreno, our hippie inventor, had a solution. He thought, you know, we're using computer chips and computers. They have this vast power to calculate and compute. Why not use a computer chip in a credit card transaction? A computer chip could make each purchase unique. It would create a unique code, and it would be virtually impossible to copy that chip. So the card reader in the store would say, yes, that's a real card without ever having to make a phone call.

SMITH: But this is the 1970s, so putting a computer chip in anything seems very expensive and complicated and far-fetched.

LASSUS: Stupid idea coming from stupid French (laughter) was not - didn't look very serious.

LONGORIA: One of the problems was where would the chip go? It seemed hard to put it on a card, right? Like, cards are bendy. You take it in and out of your pocket. The static electricity's going to mess with the computer.

SMITH: And chips back in the old days are larger than they are now.

LONGORIA: Right, so Roland thought, why not ditch the card altogether and put it on a ring?

SMITH: We don't know if Roland was a big jewelry owner, but he didn't use one of his rings.

ROLAND MORENO: Actually, it's my ring. He stole one of my rings and put a chip on it and - (laughter) I didn't (unintelligible). I never - I always wondered what happened to that ring.

LONGORIA: That is Roland Moreno's ex-wife, Stephanie Stolin Moreno. And she says being married to an inventor was hard.

MORENO: He was a fascinating guy but not easy to live with him. People like that usually aren't.

LONGORIA: So the ring never quite caught on.


SMITH: Yeah, I'm not wearing one now.

LONGORIA: So eventually, Moreno and the engineers figured out how to put a chip on the face of a credit card. But even then banks and stores didn't seem interested.

MORENO: Well, for many years, you know, we weren't earning a cent, and Roland was sure that we just - we're going to be poor all our lives.

LONGORIA: But, Roland was saved by this one thing. The fraud in France kept rising and rising, and it became harder and harder for the banks to ignore Roland.

MORENO: He just kept phoning people and knocking on doors until it finally happened.

LONGORIA: Roland Moreno's chip was eventually adopted as the solution for fraud in France.

SMITH: And French criminals said, (speaking French), you have outsmarted us, and they give up.

LONGORIA: No (laughter), the fraud actually migrated.

OLIVER MANAHAN: Of course, fraud likes to find a new home, and it went to the U.K.

SMITH: That is Oliver Manahan. He used to work at MasterCard as they planned for this big switch over to chips. And he says, fraud always moves to the weakest link. In this case, French fraud moved next door or I guess we should say across the channel. Counterfeiters started to make fake credit cards in the U.K.

LONGORIA: That is until the Brits decided they would switch the chip. And then the fraud kept on moving.

SMITH: Criminals did the grand tour of Europe. By the early 2000s, all of Europe is, like, all right, fine, fine, we're putting the chips in the cards.

LONGORIA: So this stupid French idea becomes the universal solution to fraud. They called it EMV, short for Europay, MasterCard and Visa, the three companies that decided to make it the standard.

MANAHAN: Well, then of course, the fraud looks for the next weakest link, which, you know, became North America or some parts of Latin America or some parts of Asia-Pacific.

SMITH: All of the major economies eventually adopt it.

LONGORIA: Except us.

SMITH: Except for the United States of America, this cutting-edge French technology of the 1970s takes 40 years to get to our shores. And for the final part about why this took America so long to copy the French, we're going to go back to our own senior producer Alex Goldmark. Thank you so much, Julia.

LONGORIA: Thank you.

SMITH: So, Alex, if it was good enough for the French, why wasn't it good enough for us?

GOLDMARK: We are different, Robert. We aren't everyone else. America is bigger than all of the other markets. There's just more banks and more stores, way more people that all have to agree on switching at the same time because this is the kind of thing that you can't do by yourself.

SMITH: I mean, obviously, like, if you just put out a credit card with a chip on it and there's no readers, that won't work. You don't put the readers in your store before anyone's put the chip on the card. Everyone has to do it at the same time. It's what we refer to as a collective action problem.

GOLDMARK: Everybody could see and visualize the world they wanted to get to, where they all worked together and stopped fraud. But nobody would take the first step.

MANAHAN: It really is a critical mass sort of game where you have to get everybody involved and working towards the same common goal.

GOLDMARK: And it's not just coordination, right? So if you go first and put the chip on your card here in America and you do it like Europe does it, then you also have to add in a PIN, a four-digit number, that you remember. And so then that's a disincentive.

SMITH: Because I have four credit cards in my wallet, and I'm sure as hell not going to use the one that requires me to stick it into a machine and put a code in. We need to use the easy one.

GOLDMARK: And so this is the type of situation where often the way you solve it is you have some central power, maybe a government regulator, come in and say, everybody, you've got to do X by a certain date.

SMITH: But another way collective action problems are solved is if the largest player in the market makes the first move. And in this case, there was a large player, the Visa corporation. In August 2011, Visa announced this little change to its contracts. They gave a warning. They said, in the future, whoever doesn't upgrade to a chip, they will have to eat the cost of the fraud.

GOLDMARK: So if there's a store that doesn't accept the chip and then there is a fake credit card used there, then the store has to pay. But if the bank, if they don't put the chip on their card and one of their accounts has fraud, the bank has to pay. Whoever is the weak link now has to pay the tab for fraud.

MANAHAN: Unless you put some sort of sign in - line in the sand that says, you know, you will bear financial responsibility if you haven't upgraded to the more secure technology, then people will sit there forever and say, I don't have a business case.

GOLDMARK: It was the new 747 jumbo jet in the room.

MANAHAN: It's a bit of a carrot, it's a bit of a stick, depending on which side of it you're on.

SMITH: Visa's gambit works. MasterCard and American Express follow. The banks say, yeah, yeah, yeah, we'll do this chip thing. And then five years later, I get a card in the mail. And I have to say, like, I'm kind of excited at first because it looks really high-tech. It's a chip. Every time a chip goes into something I own, that thing gets better. And then all of a sudden, I go to use this chip card, and it takes forever.

GOLDMARK: So I brought this up with Oliver Manahan, the cheerleader for the chip. He said, it's not actually that slow.

I don't know. Can - I timed how long it is. Can I just walk you through what it's like?

MANAHAN: Yeah, absolutely.

GOLDMARK: OK, so I'm at the register. I take out my card. This is real time right now what we're doing here. I take out my card. I say, hey, cash or credit, I want to pay credit. Here's my card. I'm dipping my card now.


GOLDMARK: And there, now I get to take it out. That's a long time. What's going on there?

MANAHAN: I'm trying to sense is it five seconds versus the half second it takes to swipe, something like that?

GOLDMARK: Yeah, it's about six seconds for less than one second.

MANAHAN: Yeah, so the card remains in the reader for that duration because it's actually getting communication back from the bank to say, I've authorized this, and now I'm going to let you know that you are communicating with your valid bank. So there's a two-way communication. So the security goes up, but to your point, the time goes up as well.

GOLDMARK: And after I talked with Oliver, I found out at some places, it takes up to 15 seconds. Do you know how long that is? Here, let's do that, 15 seconds.

SMITH: Well, I just can't do it. I can't take it.

GOLDMARK: (Laughter).

SMITH: I can't take it. I got to do it with my card all the time. I cannot take another 15 seconds out of my life.

GOLDMARK: And I know it seems petty to be griping about 15 seconds because it's - it is also on the other hand just 15 seconds. But like, you know what you can do in 15 seconds? You can do some math. Take it at five seconds, the low average. Five seconds times the 200 million credit card swipes there are every day, and do you know how much time that is? That is 32 years of human life spent staring across the counter at a clerk that wants you to just take your card and go away.

SMITH: It does feel like 32 years.

GOLDMARK: But on the other hand, think about how much harder it is to copy a credit card now. You can't do it with a boom box.

SMITH: But eventually, like, someone's going to crack the chip.

GOLDMARK: Oh, Robert, that happened a long time ago because the chip started in Europe a long time ago. Come on.

SMITH: (Laughter) So they've already cracked the chip. And then six months from now, a year from now, they've added something else to my card. They've put another thing, a fingerprint scan, a retinal, something or other.

GOLDMARK: Yup, probably.

SMITH: And it seems to me that at some point, you have to say, fraud is always going to exist. I mean, we don't frisk everyone who leaves a store just because shoplifters exist. At some point, you just have to say, let's stop this escalation of the credit card.

GOLDMARK: I know that you're joking a little bit there, but the next phase of the cycle, it's already starting to repeat itself. Fraud is already migrating to the next place, which is the Internet.

SMITH: Where you don't need a physical card, you don't need a copy of anything. Just hit the numbers.

GOLDMARK: And so the credit card companies, they already have their next step in this post-card world, and it is your phone - Apple Pay, Google Wallet, MasterCard. It already works, and you can just tap and go.

SMITH: So just to make this clear, we waited 40 years for the chip, and it's already kind of out of date.

GOLDMARK: Slow to come, slow to use, maybe quick to leave.


SMITH: And criminals, criminals, that sound that we played at the top, not actually a credit card. It was our MetroCard. Let us know what you thought of today's episode. In fact, let everyone know what you thought of today's episode. You can find us on Twitter @planetmoney or on Facebook.

GOLDMARK: And we've been having a tough time trying to find out exactly how long it takes to dip a credit card.

SMITH: Is it six seconds, 15 seconds?

GOLDMARK: We want your help in figuring it out. So the next time you;re going to use your chip credit card, take out your stopwatch and time it. We put up a form on the episode page at our website. Please go and tell us how long it took you to dip the chip.

SMITH: Big thanks today to Julia Longoria and WNYC's podcast Money Talking. It is a weekly look at what's going on in the world of business. Check it out.

GOLDMARK: And special thanks to Ralph Dangelmaier and Bob Hunt. They both helped us out with our reporting on this episode. Jess Jiang produced it. I'm Alex Goldmark.

SMITH: And I'm Robert Smith. Thanks for listening.

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