Evan Schuman's StorefrontBacktalk

A Los Angeles company on Wednesday announced a new approach to digital gift cards, with an eye on security.

Imx Solutions said the products are initially being used by Sears, Kmart and CompUSA along with television’s Ultimate Shopping Network (USN).

Giftcards are quickly becoming an extremely popular retail payment option, but the traditional analog cards suffer from a lack of security when used for E-Commerce. The card itself becomes virtually irrelevant, with the number?which can be guessed or hacked into?the only means of identifying the card. Customers who purchase cards that have already been emptied of their value?presumably fraudulently?usually have little recourse, beyond blaming the retailer.

The Imx approach uses a two-factor authentication approach?aka the “something you have and something you know” tactic. The “something you have” is a credit-card-sized CD and somewhere on that CD?or near it, in the CD’s packaging?is a PIN associated with that card. The PIN will typically be hidden until the purchase is made, and will be often be visible when?for example–a protective coating is scratched off, said Imx Sales/Marketing Director David Farris.

But the “something you have”?the CD?also takes a page from the one-time-password-issuing devices because it has a series of encrypted codes on it that needs to match up with a list of encrypted codes on an Imx server and the correct code “changes twice a minute,” Farris said.

When a customer installs the mini-CD into a computer, it first plays a multimedia advertisement while the card connects with the server and tries to authenticate the customer’s card.

The cards boast both storage and stored-value capabilities and Imx is pushing them as a multimedia advertising vehicle.

But the nature of the mini-CDs also have the potential for both adding additional security as well as CRM capabilities. That is true in the sense that they can capture and transmit IP address information (for additional identification of the user) along with potentially information about what the user is clicking on in the E-Commerce site and possibly even where they visited before and after.

Farris said his people have considered such possibilities, but that different customers of theirs will use different capabilities and that various states, cities and countries have conflicting privacy rules about such data acquisition.

This raises the issue of the morphing of another retail POS and/or marketing tool. Will the digital giftcard morph with the credit card and the loyalty card? Could a contactless payment card communicate and share data with a wireless-equipped digital giftcard?

In the same way that smartphones (which themselves are the morphing of cellphones and PDAs) are turning into personal Point-of-Sale systems, able to interact with vending machines, ATMs and cash registers, will gift cards and credit cards evolve in the next two years into something unrecognizable to us mere mortals from 2006?