Originally created 12/18/00

Card companies want you to get smart



Imagine a single card that lets you purchase and download an airline ticket using your PC. That same piece of plastic could also pay for a restaurant lunch, open secure doors at the office, check out books at the library. It could even become your car keys.

Sound like a script from the Jetsons? Not really.

Such is the promise of smart cards, wallet-sized plastic cards with embedded microchips that major U.S. credit card issuers are rolling out in a big way in the next few months.

Smart cards, albeit with limited uses, have been popular for years in Europe and parts of Asia and Latin America. The industry says it has shipped more than a billion a year since 1998.

In lieu of change, the cards are widely used for pay phones. In some types of cellphones, they're used for security, billing and storing frequently used numbers. The financial sector also likes them: In France, every Visa debit card has an embedded chip.

Despite pilot projects, smart cards have never been a commercial hit in the United States, however. For U.S. card issuers, there's been inadequate financial incentive while retailers have shown little interest in acquiring new card readers to replacing the magnetic-only variety.

Some financial powerhouses are betting they can change that now. They're banking as first adopters on the estimated 35 million online shoppers - almost double that of last year - who are looking for secure ways to shop and add value with exclusive discounts and other promotions.

In September, Visa U.S.A. teamed up with three of its top ten credit card issuers - First USA, Providian Financial Corp. and Fleet Boston Financial Corp. - to offer a suite of services led by secure online purchasing. To entice consumers, they are throwing in free PC card readers and touting introductory rates as low as 0 percent with no annual fee.

Meanwhile, MasterCard, for whom big markets include Brazil and Japan, announced last week that it would be introducing its own smart card in the United States beginning next month - offering secure identification as well as credit and debit functions to begin with.

Microsoft, predictably, is also in the game. Software for smart card readers is included in its Windows 2000 operating systems.

The incentives for the credit card industry are great.

First, chipcard use could considerably reduce the $1.09 billion that credit card companies lose annually to fraud, according to the Nilson Report, an industry newsletter. And with the per-unit cost now down to $3, compared to $12 a year ago, the cards are now much more economical to deploy widely.

Though smart cards are expected to initially be used commercially in the United States as little more than secure electronic purses and ID cards, experts predict myriad uses starting next year.

Thanks to the improving power and versatility of microprocessors embedded in the cards, consumers will not only be able to better protect themselves against online fraud as they bank or trade stocks. They will also be able to store digital cash, personal information, Web site passwords and addresses, and such things as loyalty coupons from merchants or frequent flyer points.

As circuits on the cards are upgraded to hold more memory and functionality, cardholders may eventually be able to store everything from driver's license information to medical insurance data and monthly rail or bus commutation tickets - all on a single card.

The Visa move comes on the heels of the September 1999 launch of American Express's Blue, a chip-embedded card that allows consumers to transfer credit card information securely online with the help of a card reader. By year's end, American Express expects to sign up 4 million users.

"We're seeing some enormous steps forward," said Donna Farmer, president and chief executive officer of the Smart Card Forum, a not-for-profit association largely financed by membership dues from 200 corporations and universities.

Worldwide sales of smart cards are expected to skyrocket to $8.1 billion by 2004, from $2.4 billion this year, with about 40 to 50 percent of that growth from the United States, according to Dataquest, the research arm of Gartner Group.

Why the big push now? After all, just two years ago Master Card International, Visa USA, Citibank and Chase Manhattan Bank shelved a smart card trial on Manhattan's Upper West Side after just one year in operation.

Smart card executives say that project bombed because customers were confined to just one part of the city.

Promoters say smart card use by retailers was hurt in Europe by high telecommunications costs incurred as merchants attempted to authenticate transactions - a situation that has now changed with plummeting tariffs.

That's not a problem in the United States, says David Robertson, president of Nilson Report.

And the security enhancements are a big plus:

When shopping online, customers stick the card in the reader, and punch in their personal identification number. At a restaurant, the user needs to have the pin number to unlock the card.

If the card is stolen, the account is deactivated and customers receive a new card with key account information restored on the chip.

While smart cards are appealing to consumers by offering another level of security for online shopping, their prime attractiveness to card issuers is their role as relationship-builders with merchants, said Charles Walton, senior vice president of TKI, a security consulting firm in Mountainview, Calif.

Issuers face considerable challenges, however.

On top of the lifestyle changes involved - and twisting the arms of technophobes - merchants will need convincing because it is they who must upgrade magnetic strip readers.

At the same time, computer manufacturers will need to incorporate card readers into their PCs and laptop computers as standard equipment.

To date, smart cards have been successful in confined U.S. rollouts, from college campuses, where students use them to pay for books and meals, to military compounds in Bosnia.

The Department of Defense began using smart cards in the 1980s to track soldiers. After a number of trials, it announced last month that it would expand smart card use to 4 million people - active duty and civilians - a process that will take two to three years.

At the Marine Corps base in Kaneohe, Hawaii, leathernecks have since 1992 been using smart cards that now consolidate five to 10 uses into one piece of plastic. Cards are used for identification, to store meal vouchers and as electronic keys to gain access to buildings.

They are also used for human inventory. Information previously typed into a computer as Marines board a plane for a deployment is now downloaded into a punch card-type machine.

"In the past, it would take four hours to manifest a Boeing 747 or DC-10-type of aircraft," Lt. Col Stephen Cameron said. "We have cut it down to 35 to 45 minutes.

The Washington D.C. metro commuter rail has also embraced the smart card. To date, 110,000 commuters have signed up for the system's SmartTrips stored value cards, which can hold up to $200. That represents half the system's peak hour riders.

In the Visa rollout, each of the three issuers carefully set themselves apart with different features.

-Fleet Boston's Fusion cobalt blue card comes with some applications built in - including payment, digital identification and secure Web purchasing, according to Jay Lee, senior vice president of EBusiness Strategic Development for Fleet.

Customers won't be able to download coupons or participate in other loyalty programs until the first half of 2001. Later on, the cards could be customized for uses including storing airline frequent flier miles.

-First USA's card has software that allows customers to load personal information onto the card to enable faster and secure online ordering.

"We are looking at the customers' needs and developing programs accordingly," said Jeff Uncle, first vice president of corporate affairs.

-Providian's clear card enables customers to immediately secure online transactions. By mid-2001, they will be able to download e-coupons and eventually be able to track various discount coupon programs with merchants.

"In the beginning, it will be similar, but as the technology changes, consumers will start to see differences," said Alan Elias, vice president of corporate communications.

On the Net:

http:www.scia.org/default.htm

http://www.smartcardforum.org/

Associated Press writer Jaymes Song, based in Hawaii, contributed to this article.