Academic journal article ABA Banking Journal

The Smart Cards Are Coming! but Will They Stay?

Academic journal article ABA Banking Journal

The Smart Cards Are Coming! but Will They Stay?

Article excerpt

With smart card pilots sprouting all over the U.S., bankers are searching for the cards' true business case.

Meanwhile, there is the U.K.'s ambitious Mondex test (p. 52)

American peanut farmers use them to log in crop data. Army and Air Force personnel carry their ID and records on them. Russians use them in Moscow subway stations to buy train tickets. The French use them to make phone calls and Danes use them at vending machines. Residents of Swindon, England, use them to pay shopkeepers and each other.

Employees at Bank of America, CoreStates, Chemical, Wells Fargo, and other large U.S. banks use them to buy lunch and snacks. Food stamp recipients in Ohio and Wyoming use them to buy groceries. This fall, Citibank will provide them for the State University of New York in and First of America Bank will offer them at the University of Michigan, Ann Arbor and Western Michigan University, Kalamazoo.

Smart cards--plastic cards with computer chips embedded in ing to be used for prepayment, debit, and credit purchases all over the world.

In the U.S., smart cards have only been used so far in "closed" tests--pilots in which cards can be used only at a contained group of machines, or for one purpose.

In October, the first open U.S. pilot will begin, when First Union, Wachovia, and NationsBank start offering smart cards to Atlanta consumers in preparation for a pilot at the 1996 summer Olympics.

There will be 100 million smart cards in the U.S. by the year 2000, predicts Joseph F. Schuler, who last month was appointed senior vice-president of business development of Stored Value Systems at National City Corp., Cleveland. "By the year 2004, all ATM cards in the U,S. will be smart cards," he says.

The smart card is part of the payments system revolution, according to Catherine A. Allen, vice-president of Citibank's Technology Office and chairman of the Smart Card Forum, a group of banks and vendors interested in smart cards.

"Smart cards are not a product, they're a new delivery system," she says. "They're part of the broader shift to electronic delivery, to making ATMs more functional, to using PCs and the internet to do home banking, to going to POS terminals to get cash back, to getting electronic benefits transfer off of a card."

"What chip technology brings to the industry is the ability to differentiate yourself at the point of sale or a point of transaction," says Edgar Brown, senior vice-president of alternative delivery products at First Union, Charlotte, N.C.

Why a chip?

One of the touted advantages of using chips on cards with or instead of magnetic stripes is better security. While it's easy to tamper with or counterfeit mag stripe cards, microprocessor chips are very difficult to alter or forge. Data on the chips are encrypted. Eventually chips will store such biometric data as voice prints, fingerprints, and retina scans. To destroy a chip card you'd have to bend it until it breaks, says Holger Mackenthun, president of the U.S. operations of German card maker Orga Card Systems, Paoli, Pa.

Chips can carry more information than magnetic stripes can. A microprocessor chip can, at present, store up to eight kilobytes of data. A microprocessor card could handle stored value (prepayment), debit, and credit payments as well as store health records, plane tickets, reward program points, and phone numbers. Memory chips can hold up to one kilobyte of data.

Smart cards make possible cheaper and faster payments. Money can be deducted from a chip without on-line authorization. This makes for a two-second transaction versus an up-to-two-minutes one, and telecommunications costs are saved.

The infrastructure hurdle

The greatest stumbling block to smart cards in the U.S. is the "i" word: infrastructure. The 125,000 to 130,000 magnetic stripe-reading ATMs and approximately 375,500 mag stripe point-of-sale terminals in this country mean a national conversion to smart cards will be costly. …

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