Target Aims To Break Chip Card Impasse

Smart card executives have long been seeking an end to the stalemate that keeps U.S. merchants from accepting chip cards at the point of sale, and they may have found it in Tuesday’s announcement by Target Corp. that it will install chip-reading terminals in all 990 Target stores by the end of next year — and issue smart cards to boot.

Though prices for chip-reading terminals have come down precipitously, merchants have shied from buying them or from converting their own stocks and argued that not enough U.S. consumers hold smart cards yet.

Target, the discount retail chain with stores in 46 states, says it will not only embrace the technology at the point of sale, but it will also use its bank subsidiary to start issuing a general-purpose Visa credit card with both a magnetic stripe and a microprocessor chip this year.

Executives at Visa U.S.A., who helped Target develop the Target Smart Visa card, predicted the retailer’s moves would be a landmark in the adoption of smart cards in the United States. Target is considering expanding the program to the other stores it operates, which include 64 Marshall Field’s stores and 266 Mervyn’s.

“This is a big deal,” declared Jerry Storch, vice chairman of Target. “This will make the market for smart cards in the U.S.”

Target has three primary goals for the chip, he said: online purchase security, online couponing, and loyalty. Online security will be the first application, and couponing and loyalty will be rolled out next year, when the readers are in the stores, he said.

“Target has a set of assets no single bank or retailer would have,” Mr. Storch said. “We have a large retail operation where we can install chip readers. We have a large established credit operation. We are serious about our credit business.”

The company, which has issued more than 18 million private-label store cards, will try to convert some customers to the Target Smart Visa, he said.

POS terminal conversion has been “a chicken-and-egg problem,” Mr. Storch said. “We can break that. We have the ability to make it work.”

Target has been making a concerted effort to move more squarely into financial services. The discount chain, which courts the hip and savvy with wry advertising campaigns, has already broken into fresh territory by inviting E-Trade Group Inc. to open financial services boutiques in some of its superstores, and the new smart card product is apparently an extension of its effort to show its forward-thinking side.

Mr. Storch did not rule out a tie-in with E-Trade on the smart card product, which he said can “deepen our relationship with our guests” and “underscore our commitment to introduce creativity and excitement.”

From Visa’s perspective, the move represents a jump-start for smart cards. Target’s announcement came only a few weeks after the Cardtech/Securtech conference, where smart card executives discussed the urgency of getting merchants on board.

“This will be heralded as a significant movement on the part of the U.S. movement to chip,” said Diana P. Knox, senior vice president of smart card applications and market development for Visa, which helped Target develop of its smart card product. “It will become a catalyst for merchant movement.”

The Target card’s 64-kilobyte microprocessor chip can carry as many as seven applications, Ms. Knox said. Transactions will not require a personal identification number, she said.

The company is “still early in planning” and “looking at a wide range of ways to use the technology to enhance the customer experience in stores,” she said.

American Express Co., whose Blue card was the first smart card available in the United States and has remained the most popular, has emphasized the use of the chip for Internet security and authentication, and the three Visa issuers that have come out with smart cards — Providian Financial Corp., FleetBoston Financial Corp., and the First USA division of Bank One Corp. — have followed suit.

While Target will promote those uses, it will be the first issuer to tout using the card at the point of sale.

According to Ms. Knox, any Visa smart card, whether it is issued by Target’s Retailers National Bank or another entity, will work in the POS terminals Target is installing. However, Amex Blue cards will not, because American Express has not made its chips compatible with the EMV standard (Europay-MasterCard-Visa) that the card associations are using.

Other chip card issuers lined up to hail the competition from Target as good news.

“It will help continue to raise customer awareness of the value of chip,” said Jeffrey Unkle, a First USA spokesman. “It is significant that a major merchant like Target sees a significant value for a chip card.”

“We are pleased that a prominent retailer has stepped up to the plate and will soon accept smart Visa cards, including Fleet smart Visa cards, on a national basis,” said Scott Rau, senior vice president at Fleet Credit Card Services.

“We feel the merchant value proposition is second to none, and Fleet was the first smart Visa issuer to preload a loyalty application on smart Visa cards,” he said. “We believe Target is just the first of many retailers who will accept smart cards, including Fleet smart Visa cards, in the near future.”

European Union countries have been moving forward with an issuer and merchant changeover to chip for the last several years, primarily to reduce the high credit card fraud rates in those countries. Ms. Knox said fraud was not the issue in the United States.

Unlike Visa’s European operation, Visa U.S.A. has not offered financial incentives to merchants to coax them to install chip-compatible terminals, Ms. Knox said. Instead, it is working to convince potential issuers and merchants that the chip is the way of the future, that accepting chip cards signals to consumers that a company is techno-savvy, and that the price of conversion has dropped to affordable levels.

“Differentiation results in higher new account-acquisition rates,” she said. “If you are focused on retention, you hope new utility will cause customers to retain your card. That is why issuers are interested in this technology.”

Target’s unique position as both an issuer and a merchant could put the chips to double marketing use, offering an attractive novelty to both frequent shoppers and more casual visitors in the market for a chip-based card, she said.

Visa executives hinted recently that more than one merchant would agree to shoulder the expense of putting chip-reading terminals in their stores.

“Merchants need to see enough cardholders with chips, and cardholders need to see places to use the chip,” Patrick Gauthier, senior vice president of smart card applications and market development at Visa, said in an interview last month.

As issuers put more chip cards in consumers’ hands, he said, they would eventually reach a “critical mass” that would make merchants willing to bear the expense of conversion.

Target has shown in the past that it is not afraid to be first to market with new financial services products. In 1995, when it was called Dayton-Hudson Corp., it launched the first discount store credit card.

George Rosenbaum, chairman of Leo J. Shapiro & Associates, a Chicago market research firm, said Target is looking for a way to retain customers. “Right now they probably have cards with 30-33% of their customers, and they need to up that,” he said. “It opens up a range of things and give them database marketing possibilities.”

While Mr. Rosenbaum said that Target is “way out in front of most other retailers” with its chip card plan, he said he saw nothing compelling yet about smart card programs.

“I have no idea what the card will do for the customer that will make a difference to her,” he said.