are a few scientist-entrepreneurs who believe they have cracked the code for smart card profitability.
They say they went about it by doing what bankers, who have found it next to impossible to justify major investments in advanced-technology cards, might least expect.
For one thing, they did not obsess about the card itself. Many U.S. bankers who looked into smart cards simply concluded there was no strong business case for them. The Battelle group built a business case first: a transaction service for retail stores. Smart cards then fit into it.
That business case had almost nothing to do with stored value, the automated cash function that many assumed would be the first and easiest application for the computer chip on a plastic card.
And with bankers largely on the sidelines, at least in the way the American market has unfolded, the Battelle developers sought and won support from a sector that has been up in arms about its own dealings with the banking community: the supermarket industry.
Out of this contrarian thinking has emerged Global Transaction Co., which Battelle Memorial Institute incorporated in 1997 to rethink the retail payments system. It is still a small deal, with a staff of six, but they are beginning to pump up the publicity volume as they close in on a couple of system implementations.
Battelle, a research and development institution famous for its role in inventing xerography, has sunk $2 million into Global Transaction Co. and has begun seeking additional investors or business partners. That is another reason that these innovators are taking some of the wraps off of what they have been doing over the last two to three years. They need financing to spread their wings.
They have elaborately diagrammed a merchant processing service that would clear a path for smart cards. They have a prototype set up in one of the Battelle buildings in Columbus, but because the network is built on Internet technology, the system doesn't take up much space.
They did invent a couple of pieces of equipment -- a touch-screen information kiosk with World Wide Web browser for store entryways, and a transaction terminal for checkouts -- because nothing on the market met their specifications for accommodating magnetic stripe cards, chip cards, check imaging, and biometric identification, among other things, in one unit, in a small enough space, at a low enough cost.
The technology, fashionably "thin client," is clearly something special, but it was not what Bruce Niswander, chief operating officer of Global Transaction Co., or GTC, described as "the driver."
"Don't lead with technology," Mr. Niswander said, describing the GTC philosophy. "Lead with value delivered, and the technology will follow."
"Our idea is to start where you have a value proposition -- the point of sale -- and move up the transaction chain," he said. "Unless you deliver enough benefits, you can't justify new equipment," which has been one of smart card promoters' enduring frustrations.
By taking what Fred Renner, GTC vice president and chief technology officer, called "very much a merchant orientation," Battelle has been able to generate interest among retailers who have been disenchanted with banks' pricing for credit card and other transaction processing services. They take notice when GTC people talk in terms of a 30% to 40% reduction in payment costs, assisted by the computerized intelligence on a smart card.
The chip can maintain coupon and loyalty-point systems -- "value adds" to the retailing mind. GTC is working closely with Chip Application Technologies Ltd., an Australian company with proven loyalty technology.
The multiple-application capacity of the chip can enable consumers to consolidate their accounts on a single card, which Mr. Niswander said is a growing desire among people tired of carrying 5 to 10 credit and debit cards. Fingerprint verification can enhance security and eliminate fraud.
As the grocery industry moves to bring Internet connectivity into the store, GTC offers to be the service provider and to contribute to a "convergence" of technologies on the consumer level.
"We will have one GTC back room," Mr. Renner said. "We will use Internet-centric technologies in the brick-and-mortar environment, bring them out to the point of sale, and make the same technologies available to the home user.
"For example, the smart card and biometric work in both the store and in the home (Internet) browser." The Internet makes possible "a completely different financial structure that cuts out a lot of costly processing layers," Mr. Renner added. "If you are talking about mass-market access to the Internet," Mr. Niswander said, "what better place is there than the supermarket, which is visited by the average American 2.3 times a week?"
This might all sound too neat and pat, or just blue-sky in its hopefulness. But GTC has already managed to sell its proposition to supermarkets through the Ohio Grocers Association, and to the Lake Tahoe community in Nevada, which wants to use cards to encourage shopper loyalty.
Two special-purpose companies, Ohio Grocer Transaction Co. and Lake Tahoe Transaction Co., are supposed to prove the concept this year and next. Then GTC contemplates nationwide expansion through 2005.
GTC has identified hundreds of millions of dollars in potential revenue for its payment, information, and marketing support services in Ohio alone.
This type of business plan is nothing new to GTC's 100% owner, Battelle, which offers GTC support from a staff of 7,000 and plenty of other smart card and payment systems experience.
The president and chief executive officer of GTC, Richard J. Darwin, has been researching and developing card technology concepts for at least as long as there have been smart cards.
Mert R. VanderLind, the Battelle corporate executive vice president who serves as chairman of the GTC board, said Battelle did its first contract research on chip cards in 1979, within a few years of the first patent filings in the field.
Battelle's most visible contribution to the smart card industry is as co-owner of Cybermark LLC, a leader in systems for closed communities, mainly college campuses, with a million cards in circulation. Cybermark began in 1994 as a project within the student loan agency Sallie Mae. It evolved into a joint venture with Battelle, Huntington Bancshares -- the technologically adventurous banking company based in Columbus -- and First USA, the card subsidiary of Bank One Corp.
Most of the GTC team previously worked on Cybermark. Mr. Niswander got involved as a consultant to Sallie Mae on his specialty, commercialization of emerging technology. But there are no formal connections between the two enterprises. Mr. VanderLind said both just happen to have chip cards as a component.
Stored value is a big part of Cybermark, but in GTC, Mr. VanderLind said, "we don't use the S.V. word," though there would certainly be room for a virtual cash function if desired down the road.
GTC may be in a position to capitalize on retailer-banker antagonism, which has flared openly in an antitrust lawsuit in which virtually every major food and nonfood merchant is challenging MasterCard and Visa debit card policies. But the company's merchant-oriented strategy has an important banking component and offers to draw the industry in, though perhaps not with credit-card-like profit margins.
National Processing Co., a subsidiary of National City Corp. of Cleveland, is supplying GTC's payments backbone. For the Lake Tahoe installation, GTC said it has signed a major superregional bank as a partner, though it lacks clearance to disclose the name.
Mr. Niswander himself has worked in the banking industry. Other GTC directors include Mark Kontos, who formerly worked for Citibank, and Huntington Bancshares executive vice president and technology champion William M. Randle.
"It is the technology that has gotten us where we are," Mr. VanderLind said. "We look to Bill Randle and others to help us learn the retailing and banking points of view."
Mr. Randle said he is eager to "get something done" with GTC. He sees promise in his company's relationship with Steiner & Associates, the real estate developer responsible for Easton Town Center, a sprawling, multi-use entertainment and retailing complex that opened this year in northeast Columbus.
Huntington has exclusive banking rights in Easton. It put an 1,800-employee operations center there, including an internal Cybermark card system for identification and stored value payments.
Between Huntington and Yaromir Steiner, president of Steiner & Associates, something might get done.
"Developers love to do cutting-edge things, such as smart cards, frequency marketing," Mr. Steiner said. "This is still an early stage. We are waiting on the bank," which he said will be essential to "being on the cutting edge with smart cards" as well as providing basic financial services to visitors and 3,000 workers. "It's a small village," Mr. Steiner said, "and a small village needs a bank."
Retail grocers, on the other hand, seem to want to find a way not to need banks.
Thomas S. Jackson, president of the Ohio Grocers Association, said the piling on by banks of check processing and deposit fees and credit card discounts has become "unconscionable." He said he shares the frustration of other food retailing officials who find the average 2.35% discount rate on credit transactions out of line with their industry's 1.22% profit margin on sales.
"We have to look at where we are giving money away that we don't have to," Mr. Jackson said. "We have to begin forming alliances, or they (banks) are going to own us."
"Technology has leveled the playing field and enables the retailers to be more assertive," Mr. Niswander said.
Mr. Jackson said that Battelle, "a research group in our own backyard with great transaction knowledge came to us with a proposal to take over the whole transaction process in a supermarket." It is aimed less at a national giant like Cincinnati-based Kroger Co., which can call its own payment shots, than at "40- to 50-store companies that now have a chance to lower the cost of transactions and keep fees in line with what they do."
The Ohio Grocers could be instrumental in establishing credibility for GTC. Mr. Niswander said he is confident that "once the platform is out, money is made," even on a pilot scale, whether through electronic coupon processing, other marketing benefits, or the layering on of other services such as electronic benefits transfer.
The proposed GTC infrastructure can take on electronic benefits transfers at relatively low cost, a benefit that should interest government agencies, he said. And if smart cards ever make their way into that application, Ohio has a leg up -- it and Wyoming are the two states using chip cards with federal entitlements.
Back at Battelle headquarters, Mr. VanderLind said, "the next big step is the capitalization plan" needed to propel GTC statewide, let alone nationally.
From Battelle's perspective, if the smart card path takes some more unpredictable turns, this will be par for the course.
Battelle CEO Doug Olesen, also a GTC board member, said, "If you look at technology in general, it almost always starts out with, 'OK, you can do this, so what?' Then there are a lot of false starts, testing, development, trial and error, until it finally finds its place. That usually has nothing to do with what the original innovator thought would happen."
His best guess is that "other opportunities should come out of smart cards and electronic commerce," and Battelle has a "center of expertise and critical mass" to capitalize on them. "Our people will tend to say, 'OK, GTC is launched, now what should we do?' "
