Take the computer industry's second-largest player, Hewlett-Packard Co., with computer-related revenue of more than $31.4 billion in 1996, hungry to capitalize on electronic commerce. Add the stellar reputation of VeriFone, the leader in credit card-authorization products (Of the more than $800 billion in electronic transactions in the U.S. last year, VeriFone handled more than $520 billion.). In a stock swap valued at $1.29 billion, HP acquired VeriFone last April, making it a wholly-owned HP subsidiary. The plan? To accelerate Internet-based commerce and smart-card applications for financial services institutions, businesses and consumers. "The key realization we made was that there was a whole new world out there of electronic commerce and a whole new electronic consumer," says Glenn Osaka, vp and general manager responsible for HP's EC strategy. "And payments are essential to this new infrastructure. VeriFone's track record made it the only choice," he says. It's a multi-billion dollar opportunity over the next three to five years, Osaka says, adding, "This is not a trivial opportunity."

The merger enables the two companies to marry the physical world of processing to the virtual world of processing payments, says C. Lloyd Mahaffey, svp of global marketing and development with VeriFone. HP's balance sheet, sales force and global marketing will help VeriFone, a 16- year-old company with 1996 revenues of more than $472.5 million, expand even further, he says. "There's no such thing as a physical consumer and a virtual consumer anymore. They wander back and forth all day long between the two worlds, and this deal is a way to acknowledge the way consumers now behave."

The deal ties "together in one package all the pieces you need to create an (electronic commerce) program," says James Wells, managing director of Washington, D.C.-based Furash & Company, a management consulting firm. Hewlett-Packard can make smart cards, and VeriFone can handle the payments. Both firms are well-known and "pretty far along" in developing smart cards, two factors that might reassure nervous merchants and consumers, he says. A "host" of banks have been reluctant to let go of more-familiar magstripe technology and move into smart cards, Wells says, although many small businesses-for whom a standard two or three percent credit card fee can really hurt-may prove eager buyers for the new system. "It's a major bet by an industry leader on smart cards," says Bill Burnham, senior research analyst for electronic commerce with Minneapolis-based Piper Jaffray Inc. "If anybody's got the firepower to distribute smart card readers into the consumer base, it's Hewlett-Packard. It's basically the next peripheral after scanners and printers. They want to leverage their presence in the retail channel by using it to sell the smart card," he says.

Concerns remain. One is who will actually pick up the considerable cost of investing in all this terrific new technology: Merchants? Consumers? Ray Rahamin, HP's marketing director for consumer credit and payment systems, says it boils down to this: "What value can you add?"

"The card readers are the key barrier," says Burnham. "Merchants don't want to spend the $300 to 400 to buy the machine." It's chicken-and- egg: No one will adopt the card readers until the cards are in widespread use, but no one can start using them to buy groceries or new shoes until the card readers are there to process transactions. In making this deal, says Burnham, "Hewlett-Packard is betting that someone will make the first move." C.Kelly

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.