In Europe, cards with embedded microprocessors – “smart cards” – have been around for years. In the United States, several million consumers have signed up for the American Express Blue Visa card, and financial institutions such as Providian and Fleet have begun to issue “smart Visa” cards. MasterCard is set to deploy its own smart card.
However, U.S. consumers, at least for the time being, won’t be able to find a use for the “smart” feature. Until the majority of bricks-and-mortar vendors install smart card readers, the magnetic stripes on the cards will still be the only technology in play.
So why has the card been such a success in Europe? Smart cards, when partnered with a smart card reader attached to a PC, can authenticate a user by “talking to” the microprocessor in the card. In Europe, the benefits were clear in the context of an expensive and problematic telecom system. “In European countries, the telecom structure has been very poor, and as a result, they never moved to online verification of credit cards,” explained Adam Shostak, director of technology at Zero-Knowledge Systems. “Without online verification, anyone could print something looking vaguely like a credit card and spend money. So card companies in Europe had an incentive to push smart cards.” In fact, the key reason issuers in Europe and elsewhere around the world adopted smart cards was to reduce authorization costs and prevent fraud losses — in short, to save money. In the United States, which has extensive online mainframe-based computer networks for verification and processing, issuers are using them to make money and to differentiate themselves in an ever-consolidating market.
Potentially, smart cards have a lot going for them. They can immediately perform user authentication; they can hold personal information such as medical and insurance information; they can track consumer behavior and enhance loyalty programs; and they can store e-commerce information like the purchase of airline tickets, allowing travelers to skip the check-in process with a sweep of a card through a reader. But, other than user authentication, those benefits are in the future.
The big gap — and truly a chicken-and-egg conundrum — is merchants. “Not many merchants are accepting the card yet,” notedanalyst Alan Alper. Bill Buchanan, senior vice president of Providian Financial Corp., acknowledged that the use of the chip is limited until merchants around the world adopt it. “We and other smart card issuers are pushing heavily,” he said. “When we get to some kind of critical mass of customers, I think you’ll start to see merchants begin to adopt the technology fairly rapidly. But I don’t know what that critical mass number is.”
According to David Robertson, president of The Nilson Report, “Merchants will be the last to embrace smart card technology. They have three-year replacement cycles for point of sale (POS) terminals and for mom-and-pops it’s even longer. It will be at least six years before we begin to regularly use POS terminals with a chip reader. With nearly 10 million POS terminals in the United States, it will be a dozen years before all merchants can read a chip.”
For now, issuers and card companies are banking on consumers seeing benefits in security for now — and perhaps the intrinsically “cool” factor of having a high-tech card. “It’s first-mover advantage,” said Alper. “Half the battle is getting people aware. But it’s only going to be when these programs they tout start to come out that you’ve got something beyond hype and bluster, beyond ‘smart’.”
Adapted from an article by the Technology, Media & Telecommunications Group of Deloitte & Touche LLP.
