Investing in Tech Migrations

A couple of weeks ago, I ruminated on America’s slow adoption of new payment technologies.

We lag pretty far behind Europe and very far behind Asia in the robustness of our data-based credit systems.

But after having to manually copy my credit card onto carbon paper slips twice in one week, I came to feel that our country is truly backward when it comes to our payment systems.

Fortunately, there are changes on the horizon. These changes won’t bring us up to the most cutting-edge standards, but they are forcing a widespread technological migration, and we can at least seize the opportunity it presents.

The Change

By late 2015, every credit card will have to be replaced.

Our old swipe-and-sign magnetic credit cards will be replaced by chip-and-PIN credit cards like the ones that have been common in Canada and Europe for over five years.

The difference between these new cards and the old ones is that the new ones store your data on EMV chips as opposed to the magnetic stripe common in the old ones.

The chip generates a unique code for every single transaction, so if a purchase is made on a compromised terminal, the stolen information will be useless to make any further transactions.

Let’s face it — after the massive credit card terminal hacks that hit Target, Home Depot, and other retailers this year, it seems all of our credit cards will keep getting stolen unless we upgrade.

So to accelerate adoption, there’s going to be a sort of extinction event for old credit cards and credit card readers.

In October 2015, something known as a “liability shift” will occur, and it’s going to force all retailers to upgrade their systems to handle Chip and PIN.

What is a liability shift, anyway?

In short, whenever credit card fraud takes place, someone has to assume responsibility for the costs (the money that’s stolen, the money it costs to fix the problem, etc.). Sometimes it’s the credit companies, sometimes it’s retailers. Other times, unfortunately, it’s the victim of the theft.

After this “liability shift,” the person who has the least robust technology will be the liability.

If a retailer is still using an old mag-stripe reader and a hacker steals card data, the retailer will be the responsible party.

Because of this shift, everyone is rushing to upgrade.

Visa, MasterCard, and American Express have all pledged to upgrade, and one by one, companies that issue plastic cards are making the change.

The White House has pledged to upgrade all government-issued cards by the first of 2015, and retailers like Target, Home Depot, Walgreen’s, and Wal-Mart have all pledged to upgrade their credit systems to handle chip and PIN.

By the end of 2015, it’s estimated that 70% of payment cards will have an EMV chip.

Taking it a Step Further

Last year, Apple unveiled thumbprint-scanning capabilities for its iPhone and iPad devices. The Touch ID sensor reads a user’s fingerprint and uses it to unlock the phone or authorize purchases through the iTunes store.

One company has applied this technology directly to chip-and-PIN credit cards.

New York-based SmartMetric, Inc. (OTC: SMME) has designed what it believes is the world’s smallest in-card fingerprint scanner and has plugged it into various devices that require additional security (USB sticks, contactless cards, ID cards, etc).

Recently, the company announced it has added its biometric scanner data to standard payment cards.

The thing is, any standard card reader can be used with the card, and the biometric security measure simply turns on the chip in the card. This dead-simple mechanism protects cards from being used even if they’ve been physically stolen.

The company says it’s “actively marketing its technology to card issuing financial institutions around the world,” and it has taken to the consumer marketing channels rather aggressively.

Unfortunately, the company hasn’t yet announced any major partnerships, so the technology is currently just waiting to be employed.

In the company’s 10-Q last week, it said its technology is being sold to consumers as a premium feature that will cost between $4.95 and $9.95 per month. The cards themselves will be sold to banks and financial institutions for $50 a piece.

This is really one of the most interesting parts about the company. It has developed an ARM Cortex-based computer that is less than one-third of the thickness of a credit card and can have as much as 128 GB of storage. It’s really a marvel of modern-day miniaturization.

Unfortunately, without major partners to back it and with $19 million in debt and over half a million in cash, this 12-year-old company is still a massive risk, and its penny stock has dropped in the last couple of months.

The technology is compelling and is being strongly marketed at the right time, but it still presents the type of gamble you’d expect from a penny stock.

Two things to remember before I send you on your way today:

1. When there’s a major tech migration taking place, small companies can often hop aboard the fast-moving streams of money flowing out of the major institutions doing the migration.
2. Investing in data security won’t make you rich — unless we’re talking about financial data.

Good Investing,

Tim Conneally

 @TimConneally on Twitter

For the last seven years, Tim Conneally has covered the world of mobile and wireless technology, enterprise software, network hardware, and next generation consumer technology. Tim has previously written for long-running software news outlet Betanews and for financial media powerhouse Forbes.