Magazine article American Banker

Smart Cards: Marketing Success or Unproven Product?

Magazine article American Banker

Smart Cards: Marketing Success or Unproven Product?

Article excerpt

It has been less than a year since three major U.S. banks rolled out, with considerable promotional fanfare, Visa consumer smart cards. Now the three say they have turned an important corner with these cards, though a number of observers say they still have far to go.

FleetBoston Financial Corp., Providian Financial Corp., and Bank One's First USA say their card portfolios got a marketing lift from these credit cards, which are imbedded with microprocessors.

But analysts and others say smart cards are still unproven and face limited merchant acceptance along with several technology issues.

Though the issuers themselves won't reveal just how many new smart card accounts they've acquired, they say they are delighted with their early success.

"We started offering smart cards last fall, with the expectation that we would spend the first six months or so learning about what customers wanted and how to present information to them, and how to find the right segment of customers," said Bill Buchanan, senior vice president for business development and marketing of Providian in San Francisco. "We are incredibly pleased with the results and continue to be more aggressive in offering smart cards to customers."

But Providian and the other two banks are also the first to admit they must now go beyond cards that use the chip as a mere design feature, to ones that provide real usefulness exceeding what typical magnetic stripe cards offer.

"The game has played out on the marketing end," and now issuers "are left with the functionality," said Michael J. Abbott, senior vice president of marketing acquisitions at FleetBoston.

Visa and MasterCard expect to make major smart card announcements in the next year. In late 2000 both associations rolled out smart card platforms that would theoretically allow member banks to issue inexpensive smart cards on a large scale.

Though no MasterCard-issuing banks have unveiled smart card programs, "We are poised to make an announcement soon. We have major commitments from some of the largest banks," said Chris Rieck, vice president of marketing for global e-business at MasterCard International, in Purchase, N.Y.

He declined to name the banks.

Visa International says it expects to have seven million smart cards in the hands of U.S. consumers by yearend.

Some analysts say that the issuer's prime motivation for introducing smart cards was to get that marketing lift. Michael J. Freudenstein, managing director and senior analyst at J.P. Morgan in New York, said top issuers came out with the cards at a crucial moment - when they were consolidating and had to distinguish their products.

"The companies that are successful here are those that continue to innovate new products and try to segment the market into strips of interest," said Mr. Freudenstein.

Theodore Iacobuzio, a senior analyst for consumer credit practice at the TowerGroup research firm in Needham, Mass., agreed.

"The big story in U.S. credit cards now is the tremendous aggregation at the top end," he said. "The top 10 U.S. banks control 75% of the receivables. What do they have that differentiates themselves from the other top 10 companies? One of the answers to that can be the chip."

First USA acknowledges the role the top credit card companies' rivalry had in raising the profile and usefulness of smart cards.

"The competition is so intense that you need to look for things that provide additional utility to the consumer," said Jeff Unkle, a spokesman for the Wilmington, Del., bank. "In that sense," chip cards "could potentially boost profitability."

Other observers said the banks had to start issuing smart cards to meet the challenge of American Express Co., whose Blue chip card, released in 1999, has had unparalleled success: Amex has signed up about five million Blue users. …

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