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Chip Cards Break Out of Their Shell Last year saw momentum building for smart cards with retailer Target, issuer Citibank, MasterCard, and the government either beginning or expanding programs using the chip. Is a real business case at hand? or the last few years, the hype blared that smart cards will break through as the next big payment vehicle in the U.S. It hasn’t yet happened. But 2001 did prove to be a year when the foundation for smart cards was poured and began to set. Despite the plethora of optimistic news, smart card backers have been burned so many times that not even the most ardent proponents will predict that 2002 will end with a solid business case for chip cards. There is more reason than ever to be hopeful, however. “I don’t know if this is the break—out year,” says Donna Farmer, president of the Smart Card Alliance, a not—for—profit research and advocacy group of more than 185 firms involved with the promotion of chip cards. “But we’ve been on hockey—stick growth the last 18 months." Last year’s milestones included the continued roll out of Visa—branded chip cards from the Fleet Credit Card Services division of FleetBoston Financial Corp., Bank One Corp.’s First USA issuing subsidiary, and Providian Financial Corp. Visa U.S.A. claims the three issuers have pumped out eight million smart cards. MasterCard International and New York City—based Citigroup Inc., whose Citibank subsidiary is the world’s largest credit card issuer, got into the act late in 2001 with the citi.you MasterCard card. Initially, the card was targeted to high—end consumers. Citi’s cross—town rival, J.P. Morgan Chase & Co., in December announced that it too would offer a chip card in 2002. The topper, arguably, was the announcement by Target Corp., the hot Minneapolis—based retailer, that it would not only issue its own Visa smart card, but in 2002 would install 40,000 chip—card readers in about 1,000 Target discount stores to accept them. By quickly upgrading many of its proprietary Guest cards, Target had more than 1.4 million Visa smart cards in circulation by Thanksgiving 2001. Meanwhile, American Express Co. continued its Blue card, the first smart card launched in the U.S. And this January, AmEx did it again by launching the first Canadian chip card–the entourage–with partner Canadian Imperial Bank of Commerce. Last year also saw the acceptance of a Java—based card operating system as the agreed upon platform for smart card applications. All four of the Visa cards, AmEx, and Citibank use the Java system. This universality should boost efforts to develop a single smart card platform that can be used for payments, identification, and travel.. None of these developments, however, was enough to scatter the persistent smart card skeptics like so many Taliban before U.S.—backed Northern Alliance fighters. Experts have pointed to Europe for years to show that American consumers will take a One is that America’s telecommunication system allows easy and cheap real—time authorizations with magnetic—stripe cards. Second, even though fraud costs the card industry more than $1 billion a year, it represents only about 1% of issuers’ operating expenses. While smart cards will go far to reduce fraud, that benefit pales next to the $7 billion to $10 billion that studies have estimated it will cost to upgrade the U.S. card infrastructure to issue and accept chip cards. PRICE Another con for chips is the price. Despite decreases, a chip can cost anywhere from $3 for bare—bones functionality to $10 for a smart card capable of multiple applications, according to Ray Chinn, a consultant with Linthicum, Md.—based First Annapolis Consultants Inc. A mag-stripe card goes for a thrifty 25 cents. The chips on the U.S.—issued payment cards are good for little other than enhanced security on Internet transactions made from personal computers. The cards all come equipped with conventional magnetic stripes in order to be used at stores, restaurants, and other physical locations. David W. Nelms, president of the fourth—largest credit card issuer, Riverwoods, Ill.—based Discover Financial Services Inc., says there won’t be a business case for smart cards until retailers can process and use the chip, though he remains open to the eventual issuance of smart cards (“A Smart Outlook,” December 2001). A year ago, chip backers were heavily touting applications that use mobile phones with cards so consumers could make low—cost purchases. Clearly useful and some Europeans liked it. But the idea didn’t transplant to the states. Until just a few months ago, marketing—oriented loyalty applications seemed to be the top reason for putting chips with much more memory and security than mag—stripes on payment cards. Consumers will be able to pay for products, earn rewards and loyalty points or credits, and be able to redeem the credits. All at the point of sale, whether that is in the store or at a PC’s keyboard. Additionally, the chip may be able to store all those petty details that many of us can’t seem to remember. Aunt Betty’s birthday? Put it on the chip. The wife’s birthstone is, is...put it on the chip. “Things like shopping lists, bridal registries, electronic receipts and product warranties can be stored on the chip. It’s much easier,” says Beth R. Horowitz, MasterCard International’s vice president of e—business services. But even the most ardent supporters are saying that this year will be a continuation of building the systems to accept the cards so they can be used in a multi—application environment. Both the current crop of chip card issuers and those who plan to issue this year are stingy with details on their near—term plans. In a statement to CCM, Fleet acknowledged that developments were slower than it had hoped for its Fusion smart card but that it would continue to be issued. A Providian spokesperson says the San Francisco—based issuer has issued as many as 3 million chip cards. But distribution has slowed because Providian’s recent financial problems have limited its marketing abilities (“The Pure—Play Meltdown,” January). Pioneer AmEx bragged a year ago that it had issued 4 million of its Blue cards but it now refuses to update that number. First USA is even less forthcoming. The corporate line at Chase and Citi is that now is the time for smart cards, but the issuers are keeping close to the vest about their plans. Target, meanwhile, rejected repeated CCM interview requests. Some observers scoff at chip proponents who crow about the number of cards out there. Just because consumers sign up for smart cards doesn’t mean the chip is used, they say. “To date, smart cards are a customer acquisition and marketing strategy,” says Chinn of First Annapolis. “They have not met some unmet demand. Everyone is waiting for the killer app.” That application may become clearer with the Target rollout this summer when the chip’s capabilities for rewards and information storage will be tested. Until then, advocates are pointing to the rising demand for personal identification and enhanced security following the terrorist attacks of Sept. 11. “In the U.S., privacy and security will drive the market,” says Farmer of the Smart Card Alliance. Chip cards are much more secure than mag—stripe cards because cardholders can place restrictions on who may read the data on the chip, she says. Further, in a smart card transaction both the buyer and the seller figuratively shake hands or verify each other. That cross—check will eliminate, or at the least, severely reduce the number of bogus cards being created today by crooks using readers that capture a consumer’s data from a mag stripe. “Nothing is 100% tamper proof,” says Farmer. “But smart cards are very tamper resistant.” When consumers and merchants understand that, chips will be accepted, she claims. The Alliance is encouraging the use of the smart cards by airlines and their travelers that are looking for a quick way to authenticate the person holding the card. The Federal Aviation Administration is considering such a move, according to the General Services Administration, the agency with oversight of federal chip programs. The details are being worked out, but the general theory is that frequent flyers will, upon approval, be issued a chip card that can be used at check in. Business travelers would speed through security, a benefit for both the fliers and the hard—hit airlines. Security personnel could devote more resources to monitoring those travelers who may have less benign motives. A blend of security and payments is going on at the Washington, D.C.—based credit—union trade group, Credit Union National Association. CUNA is using SchlumbegerSema’s KeyFOB device for its systems staff to log on the CUNA’s computer network at off—site locations. The KeyFOB includes a chip on a key ring that fits into universal serial bus (USB) ports of a PC. Eventually CUNA would like to distribute the device to some of the 90 million members of the nation’s 9,000 credit unions. Those members would use it to conduct electronic banking and purchasing. The device would replace the smart card readers distributed by issuers for use at consumers’ PCs. Though the existing smart card issuers won’t share how many of the readers they’ve distributed, it’s widely believed that most are unused and gathering dust. Eventual Acceptance heodore Iacobuzio, senior analyst with Needham, Mass.—based financial—services consultancy TowerGroup, agrees that airport security has become a top issue and that chips can be an integral part of that. On the payments side, he says that the entry of Citibank is a major event, if for no other reason than its size. But it isn’t clear if Citi will put its full heft behind the citi.you product. Some of the “Citi card people are skeptical about chips,” says Iacobuzio. “I don’t know if this is a toe in water or a full launch.” A Citi spokesperson says the bank stands behind the citi.you product. While acknowledging that chip cards are still seeking a market need to fill, Iacobuzio says he leans toward their eventual acceptance. He credits Citi for targeting prime customers with citi.you, but notes that it takes about two years to determine if a new card is successful. Visa U.S.A. remains committed to chips as a payment vehicle. Diana Knox, senior vice president of smart card applications, predicts there will be at least twice as many issuers of Visa chip cards in 2002. Knox also says the San Francisco—based association is in discussions with other retailers to follow Target’s lead. Last year was devoted to building the infrastructure for processors and merchant acquirers to be able to handle the chips. Now, the major processors can run 90% of the potential card—linked applications such as rewards and loyalty points, says Knox. The challenge this year is to “find how to increase sales. All (industry) participants have to look to that,” she says. This is one area where MasterCard seems to agree with its archrival. The technology is ready, says Horowitz. The strategy at the Purchase, N.Y.—based association is to align with smaller regional retailers or issuers to incrementally increase smart card usage. The AmEx Blue card has shown that a mass launch in the U.S. won’t work because the point—of—sale infrastructure isn’t ready to process chips, says Horowitz. “We are doing individual programs like a building block system,” she says. “We want more than adoption. We want (smart) cards to be used.” That won’t happen overnight, she says. “This is an opportunity to change behavior around shopping. It will take time and thoughtful marketing.” Also in the cautiously optimistic camp are major processors like Greenwood Village, Colo.—based First Data Corp. The company’s First Data Merchant Services unit has spent the last two years getting ready for chip acceptance by preparing applications for merchant terminals and updating its host systems, says Senior Vice President Steve Van Fleet. He notes that First Data serves both sides of the card industry, acquirers through FDMS and issuers through First Data Resources. Both sides have to be ready for the coming of chips. “Strategically, it’s something we have to do,” Van Fleet says. Francois Dutray, First Data’s senior vice president smart cards, emphasizes their value to issuers. Cardholders will be able to change their applications from their own computer or at a bank kiosk. That adaptability fits in with one of the popular marketing concepts today–life—cycle management of the cardholder relationship, says Dutray. And the processors are ready for quick—change applications too, says Francois Lasnier, general manager of marketing of SchlumbergerSema’s e—transactions group. “An issuer with a cobranded card with an airline may be able to instantly reward a flier with free drinks or access to the VIP lounge when they have met a mileage target,” Lasnier says. The terminal makers are nearly ready too. About half the devices of Santa Clara, Calif.—based VeriFone Inc. are now chip ready and all the terminals shipped the last few years can be upgraded for smart cards, says Stuart Taylor, marketing vice president. The question remains on how to get merchants to upgrade if they are already satisfied with their current machines. The Target experiment is the key, according to Taylor. “I’m sure some plans are being made if Target is a success,” he says. “But others will still be on the sidelines.” But there are clearly frustrations for some firms. Like VeriFone, Phoenix—based terminal maker Hypercom Corp. has been aggressively rolling out smart card—readable products. George R. Wallner, chairman, says issuers need to catch up with hardware suppliers. “About 45% of our terminals in the U.S. are smart card—readable,” he says. “But 45% of the cards issued are not smart cards. The issuing side is lagging.” Wallner also calls on MasterCard and Visa to take the lead and announce a schedule for smart card implementation. But Horowitz and Knox say it’s not the associations’ job to set schedules for the industry to follow. (However, Visa has ruled that any European merchants and acquirers not ready to accept smart cards by January 2005 will be liable for any fraud perpetrated with a mag—stripe card after that deadline.) But there will be more smart cards in the wallets of the American public because of government efforts. These programs will lead to more use and possibly enhance consumers’ comfort level with using smart cards for payments, according to some experts. The Department of Defense is moving forward with plans to issue chip cards to an estimated 4.3 million uniformed and civilian staff and suppliers. As many as 500,000 chip cards may already be in the wallets of DoD personnel, according to a spokesperson. Near term, the cards will be used primarily for identification and authentication (“The Public Sector Takes the Lead,”). And several major metropolitan transit agencies have plans for chip cards to replace cash or tokens. Forging the path is Washington, D.C.’s Metro system with about 216,000 cards already in use. Boston, Chicago, and New York are following. George L. Albright, chairman of Atlanta—based payment consulting firm Speer & Associates, believes these government programs could be the tipping point for the acceptance of chip cards by the financial industry. “The associations, American Express, and Discover want to capitalize on that,” says Albright. “There are things going on there that are favorable to expansion of chip cards. Smart card acceptance will probably need these governmental projects along with the coordination of the associations and the processors, according to Albright. Unless those forces can work together, the chip may remain in limbo. “The banking business can’t drive it alone,” says Albright. “The associations need the top half dozen financial processors to do this.” This two—steps—forward, one—step—backward aspect of implementation of the chip has left many in the industry hopeful, but not willing to bet their company’s future on the smart card. T. Jack Williams, senior vice president for merchant relations at Louisville, Ky.—based merchant acquirer National Processing Inc. (NPC), says the cards are valuable for building loyalty and fighting fraud. But NPC isn’t actively marketing chip—card acceptance to its clients. “Many merchants are contemplating chip acceptance; our job is to be ready to
support that,” says Williams. Still, “chip or mag—stripe is the same to me. An
item is an item is an item.” Despite the recent gains, smart cards must overcome just that attitude if they are to make it big in the U.S. Copyright 2002 to Card Management |
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