SMART MONEY

  DIGITAL TOMORROW REPORT: 5. Chips embedded in credit and debit cards will make purchases faster and more secure. But there are many obstacles to widespread adoption, says Sherri Deatherage Green.

       The future of internet money is all in the chips. The major players may place their bets on different tables, but they all wager with the same slivers of silicon. Some of these chips will show up in plastic cards used to access credit lines, bank accounts or “e-purses.” Add tiny radio transmitters and, like Hong Kong commuters, we may pay subway and bus fares without taking payment cards out of our pockets. Built into mobile phones with short-range wireless connectivity, the same kinds of chips will let us buy candy bars from vending machines without using coins something Finnish consumers already enjoy. Motorola is now selling cellular phones in France with slots for interchangeable smart cards, potentially allowing consumers to use the same piece of plastic to buy things online, in stores and via mobile phones. The technology is here. The challenge for promoters of monetary mechanisms is not dealing the cards, but getting consumers and merchants to play with them.

     Credit, debit, loyalty tracking or stored value cards get “smart” when they are imbedded with microprocessor chips. In Europe, early smart cards served many of the same functions as a magnetic stripe cards in the United States. But smaller, more powerful chips have pushed smart card capabilities far beyond what magnetic stripes can handle. Chips can store 100 times more information than magnetic stripes, offer enhanced security features, and can contain several software applications, enabling individual cards to carry out separate functions simultaneously.

     In the United States, American Express introduced its chip‑enabled Blue card in September 1999, and Visa followed with a similar offering a year later.  But few consumers are using smart cards yet, and merchants aren’t rushing to update checkout stands until the cards become more prevalent.

     The adoption of smart cards and mobile commerce in the states will likely continue to lag behind progress in Europe, due in part to less concentration of economic power. Central banks across the Atlantic can mandate adoption of certain standards favorable to smart card proliferation, while our looser market tends to be more chaotic, says Theodore Iacobuzio, an analyst with the TowerGroup. Big credit card companies may encourage financial institutions to play, but they don’t always deal from the same deck. And banks may choose not to bet on smart cards. “I think it’s going to be the Wild West for at least 10 years,” Iacobuzio says. Universal acceptance of smart cards here will take a decade or more, he opines, while buyers and sellers contend with multiple transaction formats.

      Software and operating systems for smart cards vary widely. Leading operating systems include MULTOS, Java Card and Microsoft Windows for Smart Cards.  While some technology standards have been agreed upon by major players, other questions remain open. The proprietary nature of some mechanisms also raises interoperability concerns. Visa backs the Java platform, for example, while MasterCard has invested heavily in Mondex, a UK-based application that lets users load value onto smart cards from various sources and then pay merchants directly. While Mondex is MasterCard’s preferred smart card platform, network issuers may select other systems. MasterCard expects to debut its US smart card this year.

      Adoption of smart cards at US retail stores will be slow, experts predict, due to the cost of installing chip readers at every register. In fact, all smart cards issued in the US will incorporate both chips and magnetic stripes for the foreseeable future. Since ramping up a web-site is less expensive, involving only a single transaction point, the internet should lead the way in smart card adoption. The main advantage chips hold over stripes is security.

      In the physical world, clerks theoretically compare receipt signatures with those on the backs of credit cards. That authentication is lacking in cyberspace. Many consumers feel uneasy about typing credit card numbers for online purchases, and merchants face greater fraud risk when they can’t see the people buying their wares. Direct payments facilitated through software programs storing cash value online or on chip cards reduce risk and its costs.

     Smart cards provide two-pronged authentication, explains Scott Rau, SVP of emerging technology at Fleet Credit Card Services. The embedded chip, containing an encrypted certificate of authenticity, provides a ‘physical token,’ while a PIN or password typed in by the user serves as a ‘logical token.’ One is not much good without the other.

      The next step is getting consumers to use smart card readers. Several issuers are giving away computer peripheral models or selling them at low promotional rates. PC manufacturers also are beginning to build them into new systems. Biometrics devices that read characteristics like thumbprints or facial structure also can increase security, and may give smart cards a run for their money, predicts Julie Ferguson, chief technology officer for ClearCommerce, a transaction software company.

       Flexibility is another advantage chips have over magnetic stripes. Smart cards can be programmed to handle multiple payment mechanisms, although early issuers are generally selecting from one of several options. Mondex, for example, operates as a stored-value e-purse, while Fleet’s Visa-based Fusion Card coordinates loyalty points. Both functions could reside on the same chip along with programs allowing person-to-person transactions, airline ticket processing and other services. 

      Some companies focus on exchanging value in the virtual world without having to use a link to the physical one. PayPal, for example, lets e-auction participants electronically transfer cash among themselves. In its first year, the online service signed up 4.5 million users. The company plans to partner with a credit card issuer this year to offer debit cards so customers can easilyaccess their online accounts in the physical world.

      Ferguson believes the hand that may ultimately win the digital currency game will need to solve three problems security, micropayments that can’t now be handled economically via credit cards, and macropayments for large business-to-business transactions. So far, no existing mechanism has aced all three tests, she observes.

CASE STUDY - NYCE puts buying power in CD-ROM

the dilemma of how to plug in consumers may be the main obstacle blocking quick adoption of smart cards. Financial institutions must not only mail chip-embedded cards to their customers, they must make sure they have reading equipment hooked up to their computers. Most credit card issuers are giving away limited numbers of reading devices or selling them at low rates.

       NYCE, the leading ATM network in the Northeast and Midwest, got around the consumer equipment issue by designing its first-generation smart debit cards to be read by a PC’s CD-ROM drive. “Almost everybody who has a PC has a CD-ROM drive,” notes Paul Tomasofsky, VP of NYCE’s advanced product group. “If smart-card readers become prevalent, future debit card designs could migrate to that format.” NYCE’s SafeDebit cards are roughly the size and shape of regular ATM cards, but the edges are curved so they will fit into a CD-ROM tray. Using the cards, consumers will be able to type in their PINs when making online purchases, transferring payments from their bank accounts. “Once the legacy system gets the transaction, it looks just like the data it’s been getting for 25 years,” Tomasofsky says.

       Merchants like direct payments because they aren’t as risky as accepting credit card numbers over the internet. Unlike smart credit cards, however, SafeDebit cards don’t carry magnetic stripes in addition to computer chips.  Therefore, customers must use one debit card in the physical world and another when online.

       NYCE also must round up merchants willing to accept SafeDebit cards before consumers will be able to use them. The company recently announced a slate of early-adopter merchants, and live transactions were expected to begin this month. Consumers can click the SafeDebit buttons that appear on participating e-commerce sites, insert their cards into their drives, and make direct payments for purchases.

      PULSE, NYCE's counterpart in Texas and eight other states, expects to offer SafeDebit early this year. STAR, the primary ATM network in the West and Southeast, has also announced plans to use SafeDebit. But like most companies experimenting with smart credit cards, STAR is hedging its bets: STAR and several other companies also are participating in a digital signature project organized by the National Automated Clearinghouse Association.

  Revolution USA,  February 2001

  (c) Copyright Haymarket Business Publications Limited 2001. No part of this data may be reproduced without prior written permission of the copyright owner.

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