Smart Card Pilot Ignites Canadian Enthusiasm

The merchants of Guelph, Ontario, can't wait for school to start.

It's not just that they relish the return of 14,000 University of Guelph students who swell the coffers of a Canadian town with a permanent population of around 100,000. The merchants are sold on the Mondex smart card system and see technology-savvy students as its most enthusiastic users.

Before vacations began in the spring, Mondex was beginning to make the kind of mark on the local payment system that its boosters can only hope it will some day make on the world.

In Canada, in contrast with the more skeptical and fragmented United States, the dream is shared by all the big banks and most any other financial institution that matters. The first two to buy in-Royal Bank of Canada and Canadian Imperial Bank of Commerce-decided in November 1995 that Guelph ("gwelf"), a 75-minute drive west of Toronto, would be their first showcase.

As they toiled to make Mondex acceptable at hundreds of points of sale, pay telephones, and even buses in time for the official launch last February, the program developed a strong following in the retailing community.

"Any time we can handle less cash is a benefit," said Kim Benson, manager of the first of the four local McDonald's outlets that began accepting electronic cash early this year. "This is being watched very closely at the corporate level."

"It has security, I don't have to carry cash to the bank and pay cash- handling fees-to me, it's an all-round winner," said Dan Brown, owner of a Kernels popcorn and candy franchise in Stone Road Mall, the regional shopping center.

"Almost every store here has it," Mr. Brown said of Mondex. "Because it was done en masse, it becomes easier for the general public to accept. It was clear to me from the beginning, especially for a cash business like mine, that this is a substitute for cash, not credit cards."

Like many of the local merchants who have gone to school on Mondex, Mr. Brown picked up the habit as a consumer and talks it up to others.

"It's very much a learning experience for many, but I think it's going to be big," he said.

Kevin McKitrick found the concept so compelling that, after he received his own Mondex card, he called to request an installation in the hospital cafeteria he manages at Homewood Health Center.

He organized a Mondex Week promotion in July and plans a Mondex Month in September, offering prizes to lure 650 employees into the fold. He much prefers transmitting his receipts electronically, using his merchant card and a telephone line, rather than carrying cash to the bank.

"We make a bank run every day," Mr. McKitrick said. "If 100% of the people use Mondex, it's just a phone call away."

As for his personal life, "I'm looking forward to having debit, credit, and Mondex all on one card. It will take some time, but look where debit cards were five years ago.

"When I go out, I will call ahead to see if a place takes Mondex, because I never carry cash."

With friends like these, the bankers responsible for this second- generation Mondex rollout-the first was by National Westminster Bank and Midland Bank in Swindon, England, two years ago-can count their blessings and cards.

By midyear they had passed 7,500 cardholders and were closing in on their target of 8,000 to 10,000 for the first year of operation, which will end in February. (Swindon, with about the same population as Guelph, got to about 10,000 in a year.)

"We know the number of cards that are activated and loaded at least once," said David Breault, who was manager of Canadian Imperial's downtown branch before being tapped to manage its side of the Guelph project.

"We don't know the total volume of transactions," he said, because they occur off-line. This keeps the infrastructure cost down but concerns some critics and risk managers who prefer the "auditability" of an on-line, credit-card-type system.

"We do know more than $1 million has been loaded on to the cards, and we're thrilled with the response," Mr. Breault said.

Merchants said Mondex sales were accelerating-until summer.

"One of the reasons Guelph was chosen was the university," said Ms. Benson at McDonald's. "We expect it to pick up again" as the students return in September.

"At first I did one transaction a week," said Mr. Brown. "Before the summer it was at least six transactions a day. I anticipate a return to more significant numbers in the fall."

He said Kernels still had kids coming by and making $2.50 or $3 transactions routinely, obviously with their parents' approval. "Family cards" and the ability to transfer cash value among them with Mondex wallets make for electronic allowances.

"You have an ATM in your living room, which brings home the difference of Mondex," said M.M. "Mike" Green, Mr. Breault's Royal Bank counterpart and co-manager. "That is a 'wow' for anybody."

Mr. Green was primarily responsible for the merchant signings, which have surpassed all expectations.

The effort started quietly with 12 retailers in September 1996, and 50 were on board by Christmas. The banks wanted to hold off on a "grand opening" until they could offer what they called the "full proposition"- including enough retail outlets to ensure "a broad shopping experience," Mr. Green said.

"The initial goal was 300 local, regional, and national merchants," he said. A month ago they hit 560.

"That was because the merchant implementation team worked hard," Mr. Green said. "Now we are actually being approached by merchants and service people, those who do home delivery or repairs or cut lawns. They are telling us that their customers are asking if they accept Mondex."

Hard as the process may have been, it was eased by the Canadian bankers' tradition of cooperation on payment matters.

Their greatest test is only beginning. They still don't know what the market will pay for the technology, sans subsidies.

And for all its initial accomplishments, which have attracted a constant parade of Mondex members from other countries seeking ideas on how to develop their own programs, Guelph is just a baby step.

As a unified force, called Mondex Canada, the country's financial institutions have been pursuing the national dream only since May. The two biggest commercial banks, Royal and CIBC, were joined by three more of the "big six" as well as Hongkong Bank of Canada, Canada Trust, Credit Union Central, and Caisses Desjardins of Quebec.

Bank of Nova Scotia, the holdout bank, followed soon after.

Bank card politics inevitably came into play-and unpredictably. Canada is Visa credit card country; of the biggest banks, only Bank of Montreal is a MasterCard loyalist.

Well before MasterCard International's purchase this year of 51% of Mondex International, Royal and CIBC had joined the "global founders" group led by Mondex's inventor, Natwest Group of London.

"I was involved at the time we made our Mondex decision because I had responsibility for systems and technology," said Royal Bank vice chairman Robert J. Sutherland. "We felt that sometimes one has to break new ground, and here was an opportunity to be a real leader-to get in at the beginning for a relatively modest sum.

"Then we tried to get others to the table."

The bank dispatched another vice chairman, Gordon J. Feeney, to Toronto neighbor CIBC to open discussions on a joint franchise. Their cooperation set the tone for what Mr. Green and Mr. Breault were later able to accomplish in Guelph-and for the recent spate of planning and operations meetings that followed the Mondex Canada coalescence.

Visa and MasterCard labels became unimportant. While Bank of Nova Scotia still plans to test Visa Cash, MasterCard-backed Mondex appears to have won in a rout. Bank of Montreal, Toronto-Dominion Bank, and Canada Trust decided to rescind their choice of the competing Proton technology from Belgium.

"What swung our financial institutions to Mondex was different in each case," said Caroline Burke, senior manager of stored value products at Royal Bank. "The architecture of Mondex is significantly different from any of its competitors'. It is a lot different from any traditional payment- clearing model and turns many of those assumptions on their heads.

"This took time to understand. That all have come around to this decision is very significant."

Richard Phillimore, the MasterCard senior vice president for chip cards, said Canada exemplifies how electronic cash will usually work best as a "national decision."

"All the (Canadian) banks took a strategic view of where they should be and decided to bite the bullet and go for it," he said. "That was not just based on electronic cash; they see the Multos multi-application operating system as the long-term architecture." (Multos was not ready for Guelph, nor will it be for the 50,000-card Mondex-Visa Cash trial slated for New York this fall.)

"Having one infrastructure is excellent news for everybody," said Marlene Boyaner, CIBC's vice president for stored value. "We look at it as similar to the debit card model in Canada."

Interac, the debit network, was an unqualified success, contributing to a reduction in checks and recently surpassing credit cards in dollar volume.

Ms. Burke said the Mondex organization is likely to evolve similar to Interac. The close-knit banking community has been able to manage Interac essentially by committees, without creating a bureaucracy.

Lacking a central executive, Mondex Canada relied on public affairs and community relations director Joe Clark for image- and bridge-building. Aside from marketing and advertising work-studies show more than 90% of Guelph residents are aware of Mondex, up from 45% in January-Mr. Clark helped open lines to the city and its administrator, David R. Creech.

"We hear a lot about strategic alliances in a business context, but we are looking at it in a broader context," Mr. Clark said. "From the beginning, the city has been a full partner in the launch. This is not just a case of social good will. Economic benefits accrue to the community."

Mr. Creech is as high on Mondex as the merchants. He is proud to report that Guelph is one of the first cities in the world accepting chip cards in public transit, that 650 parking meters will soon be taking them, that Mondex can be used at 250 pay telephones and in advanced-function phones in 2,000 homes and 500 stores.

"We see some operational benefits, but this also gets Guelph's name out all over the world," said Mr. Creech.

"We have a strong economic development orientation," he said. "We want to be forward-looking. We try new things."

Mr. Creech visited Swindon. "That was more of a test of the technology than of how people use it," he said, suggesting that Guelph has moved on to deeper issues.

The Canadians "certainly learned a lot from Natwest and Midland in Swindon," said Michael Keegan, Mondex International's London-based chief executive officer. "The Canadian market is well suited to this type of payment system. Canadians will respond to something with a remote payments feature, which allows them to cover distances conveniently."

Mr. Keegan said he expects Mondex to be in "multiple provinces" over the next 12 months.

In one variation, CIBC is putting up a system on Nortel's 3,000-employee corporate campus in Brampton. Ms. Boyaner predicted Mondex would be on the Internet-not a feature of the Guelph trial-within a year.

"I have to admit, everybody joined Mondex faster than I thought they would, but I always viewed it as just another clearing system," said Mr. Feeney, the Royal Bank vice chairman. "Ten years down the road, this will be big-time."

"We're still in the crawl-before-we-walk stage," said Mr. Brown, the popcorn guy. "Once the banks figure it all out, it's going to take the industry by storm."

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