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Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.

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July 6, 2021

Think Like a Genius for Payments Innovation

Ron Klein filed the patent for the magnetic strip used on credit cards in 1966, and it was awarded in 1969. His invention revolutionized the payments industry, increased efficiency, and reduced fraud. I was fortunate to meet Ron, known as "The Grandfather of PossibilitiesOff-site link", at an entrepreneur's conference several years ago. Being in the payments world, I wanted to know how he got the idea for the magnetic strip that is still on the back of credit and debit cards today.

Ron, an engineer by training, said department stores came to him with two problems. It took too long for customers to make charge purchases, and the burden of proof was on the merchant. For example, prior to the magnetic strip and online authorizations, the customer's name and account number were embossed on credit cards. Lost, stolen, canceled or past due accounts were listed in a monthly printed bulletin sent to merchants. Clerks at the point of sale waded through thousands of numbers to see if the card was not listed, and therefore acceptable. A merchant accepting a card listed in the bulletin was liable for the transaction.

Ron's first solution: He compiled the monthly records of negative accounts and stored the information on magnetic drums. The merchant then had a keypad that was connected to the stored data to look up numbers. While that expedited the POS process, it didn't go far enough to solve the problem. Keying in the card number was time-consuming.

Ron said he decided to "put some smarts in that piece of plastic" by applying reel-to-reel tape recorder technology. His idea? Record the account number on the tape, build a device that reads it like a tape recorder, connect it to the stored data, and voila! The credit card validity checking system is born!

At 85, Ron continues to mentor, coach, and inspire others to solve challenges. This requires, he said, a certain mindset: Be smart, daring, and different, and don't be afraid of making mistakes. If you want to solve a problem, you need to take some time to think about it in a certain way. Simply put, Ron said there is a gift behind every challenge that, if explored with an inquisitive mind, can bring forth innovations that can make things better for people.

I was thinking about Ron in the context of today's payments innovations, or the challenges we currently face, such as the chip shortage or fraud. What problems do you think need to be solved? By thinking like a humble genius, we see that every challenge brings an opportunity for advancing innovation.