DEMO: Dynamics to bring plastic credit cards into the 21st century

Dynamics is one of 70 companies chosen by VentureBeat to launch at the DEMO Fall 2010 event taking place this week in Silicon Valley. After our selection, the companies pay a fee to present. Our coverage of them remains objective.

Americans have been using magnetic-stripe credit cards since the 1970s. But Dynamics hopes to upgrade them to computerized smartcards with better security and multiple accounts per card — without making any changes to the existing infrastructure of magnetic stripe readers in 60 million locations. The company is unveiling its solution, the Electronic Stripe, today at the DEMO conference.

The ultimate goal isn’t just to upgrade credit-card technology. It’s to transform the existing credit-card business, with cookie-cutter cards and offers, into ones where consumers can give voice to their needs and banks can respond with personally customized offers.

The development could be very significant for credit-card issuing banks that have wanted to upgrade their service to engage and reward customers, only to be stymied by the limitations of magnetic-stripe cards. Every bank aims to be “top of wallet,” or the card that a person will use for 70 percent or more of their transactions. The second card down will likely be used only 15 percent of the time, and the third card, 5 percent. If a bank can offer better rewards, make a card more secure, or otherwise convince someone to use a card more often, the financial gains can be enormous over the life of the customer relationship.

The Electronic Stripe is the brainchild of 31-year-old Jeff Mullen (pictured right), chief executive of Pittsburgh, Pa.-based Dynamics. Mullen, who put himself through business school as he was starting his company in 2007, has recruited a crack team of payment specialists such as Philip Yen, a former executive vice president at Visa, and raised $5.7 million from Adams Capital Management. They have created a programmable magnetic-stripe card that lets banks change the functions of cards as they go.

If all goes well, the company hopes to move on from ordinary credit cards to security cards, medical cards, gift cards and other prepaid cards.

“We have built an efficient computer architecture and embedded it inside the cards,” Mullen said in an interview. “We call it Card 2.0. We think a card holder can have communication with their bank at the point of purchase. That’s where it’s going.”

To the old-fashioned magnetic-stripe readers which still handle 90 percent of today’s transactions, the card looks like any other. But each sliver-thin card has 70 electronic components and can be modified on the fly. That means the company can change the numbers that are fed to the magnetic-stripe reader.

For instance, if you press a button on one of Dynamic’s MultiAccount cards (pictured left), it will switch from one credit card number to a different one (and change the indicator light so you know which account is active). You can thus have multiple credit-card accounts from one bank, such as a personal account and a business account. The purchase is processed on Visa, MasterCard, or other card networks as a normal transaction.

Another type of card can offer improved security. Instead of a full 16-digit credit-card number, the numbers are interrupted by a display. The display will show the remaining numbers in the account only after the user types in a personal identification number on a set of five small buttons on the surface of the card. If a card is lost, a thief can’t use it at all unless he or she knows the pin code. If the result is fewer fraudulent transactions, then the banks can see improved profits.

For much of this year, Dynamics cards have been in stealth trials. The cards are actually thinner than credit cards and are both scratch resistant and waterproof. A single card can last more than three years on one battery charge. The company will reveal more details about the design later. The cards work in any kind of card reader, including motorized ATM card slots.

Dynamics stands a great chance at getting past the barrier of older infrastructure. Radio frequency identification tag (RFID) readers are being put in place in more places in order to accommodate electronic cards, but they still account for only about 3 percent of all of the readers in the market, even after billions of dollars in infrastructure investment. Another innovation, near-field communications, requires chips to be built into cell phones and it also means that merchants have to adopt new readers. But Dynamics’ strategy has the most benefit for the least pain. A programmable card fits with the strategies of a lot of banks, which are issuing different cards for loyalty programs or budget management.

Mullen’s company will sell the cards to banks. It hopes to manufacture tens of millions of the cards in the coming years and it is lining up multiple manufacturing sources so that it can do so. Mullen says each device has a small microprocessor and a certain amount of memory. The cards cost more than typical cards, but they also have more revenue potential for the issuers.

While the cards could disrupt older card makers, Mullen said his goal is to help the current ecosystem of banks and credit card companies, which is an easier sell than tearing up the entire landscape.

Mullen has put a lot of thought into the problem. He was trained as an electrical engineer at Carnegie Mellon and wanted to be a patent attorney after graduation. He went to law school and was a prolific inventor himself, with more than 150 issued and pending patents.

But he wanted to start his own company, so he went back to Carnegie Mellon for his MBA and set up Dynamics in 2007 across the street from the school. By day, he ran the company and found time to get course work done when he could; his teachers accommodated his crazy schedule. The company won various grants in business school contests, adding up to more than $400,000.

Yen, the former Visa executive, worked for years in the payment innovation space and saw how it could take 15 years for a new innovation to work its way into the system. When he met Mullen, he decided to join and he helped recruit other payment professionals.

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