Chocolate and Gold Coins

Friday, February 18, 2005

Secure Credit Cards

I had to purchase something on-line the other day with my credit card. Of course, I always worry that some cyber-thief will abscond with my number and then go on a shopping spree with my credit. It occurred to me that the risks associated with credit cards are entirely avoidable. With a little modification of the system, it would be impossible for cyber-thieves to steal your number and use it for obtaining anything of value.

Numerical signature

The idea is to replace the written signature, which cannot be produced on-line anyway, with a numerical signature. A “signature” would be a 12-digit number that only you and your credit card company would know. You would be given maybe 10,000 signature numbers and after each transaction, that number would be invalid. Since the signature numbers are one-time-use, a thief wouldn’t be able to use it even if he was able to monitor your on-line transactions and steal your numbers. The thief would have to guess one of the 9,999 valid signature numbers out of 1 trillion possibilities.

How would you keep track of your signature numbers? I think you would need a palm-pilot-type device that would store these numbers. It would then load a number and immediately invalidate it for any future transaction. Even better would be a device that could store the credit card number and the current signature number on the magnetic strip of the credit card. This would enhance the security of any credit card transaction.

Encouraging technology adoption with patents

This change seems so obvious that it begs the question: “Why haven’t the credit card companies thought of something like this?” Probably they have thought about this and discovered that there was no way to patent it. Therefore, it would be a lot of work for no increase in profits. The benefits would go to society not to any individual firm. Firms can be indifferent to crime that affects all firms in an industry equally because they just write it off as a business expense. So don’t expect firms to innovate to fight crime unless government issues a patent to a particular firm or a regulation on all firms.

One way to use patents to innovatively produce anti-theft technology is to hold a contest. The government announces a contest to all firms to devise the best protection system against credit card fraud. Firms submit proposals. In each firm’s proposal will be a description of the technology and a proposed rental rate for other firms to use the technology if the given firm wins the patent. Each proposal will be evaluated for potential effectiveness and for cost (to other firms). If none of the proposals seem worthwhile, the contest ends with no winner and the status quo. If there are acceptable proposals, a winner is selected by a panel of Ph.D. economists (who I assert must be paid extremely handsomely for this important work). The winner gets the patent and is bound by the rental rate that they submitted in the proposal. All other firms would be compelled to adopt the technology after a specified transition period.

Above is my proposal. I will only charge 50 cents per card as the rental rate for using my technology (I’m not greedy).


  • While the idea seems interesting RSA which is currently used for encryption is much more secure believe it or not.

    By Blogger Raka, at 8:33 AM  

  • That is not exactly the type of theft I had in mind. Everyone associated with the company that receives the credit card has access to the number. In fact, every time one uses a credit card anywhere, for any purpose, that number is available to host of people who might be tempted to cash in on it. It has happened to me.
    My proposal would make all such theft impossible.
    Michael H.

    By Blogger Michael Higgins, at 3:48 PM  

  • Michael, I just started reading your blog and this comment may come a bit too late. But what I want to say is that I use Citbank's Virtual CC Numbers everytime I shop online. These are numbers that can be generated online for one time use only. You can even set the spending limit on each number. I have been using this feature for a about 3 years now and I would highly recommend it to anyone who has a citibank mastercard. Great blog by the way!

    By Anonymous Anonymous, at 3:56 PM  

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