Instead of sitting around waiting for smart cards, a number of companies have started promoting prepaid or stored value services with traditional magnetic stripe technology.
Retail store chains and a few credit card issuers have been marketing these cards for a while now, as a replacement for paper gift certificates. But interest is growing in stored value for use in other areas such as payroll, benefits, insurance claims, campus marketing, and travelers checks, and several alliances have recently taken shape.
Total System Services Inc. has agreed to buy 40% of Prepaid Technologies LLC, a Birmingham, Ala.-based stored value card developer, and has the option to increase its equity share in the future. The companies will market MasterCard and Visa prepaid card products, beginning with payroll cards.
Visa U.S.A. has signed an agreement with ClaimCard Inc., a stored value technology provider, to upgrade the TravelMoney card and develop other prepaid products. ClaimCard will process all Visa TravelMoney transactions over the Plus network worldwide and is upgrading the product to work at merchants in the United States through Visa's Interlink network.
Together with FleetBoston Financial Corp. and American Automobile Association, Visa is also testing two AAA-branded stored value cards as a replacement for travelers checks, one for domestic use and one for international travel.
"Stored value is picking up speed quite rapidly," said Robert Baker, senior vice president of consumer debit products at Visa U.S.A. "It's clear to us that there's a significant market opportunity here and it's important to our banks because it does not require investment in an infrastructure to support the programs."
The bullish attitudes toward magnetic stripe stored value are a contrast to the chip card industry's move away from the product.
A smart card stored value trial on New York City's Upper West Side last year was widely considered to be a failure, and many smart card companies are now promoting other applications for chip technology, saying there is no business case for just replacing cash.
However, stored value proponents say the key to successfully implementing the product is finding niche markets where it adds value and starting out with technology that does not require new infrastructure.
"Part of the reason stored value and chip didn't work out in some applications is because of infrastructure," said Allen Pease, director of advanced card technologies at FleetBoston. "Secondarily, it was trying to replace something that didn't need replacing."
The FleetBoston-sponsored AAA pilot began in July, and 4,000 stored value travel cash cards have been issued so far, Mr. Pease said.
Two products are being offered: the AAA MemberCash card is targeted to AAA members traveling abroad, enabling them to access cash in local currency at more than 500,000 Visa automated teller machines worldwide; the AAA MemberOne card is a stored value card that can be used at Visa merchants and ATMs domestically.
Tom Wilt, managing director of AAA partnership programs, said, "members are responding positively" to the new cards. He envisions them becoming a permanent product.
Total System and Prepaid Technologies have targeted payroll applications as their initial focus. Twenty percent of U.S. employees do not have bank accounts, according to Total System, making them prime candidates for this product. Financial institutions and companies will be able to reduce expenses by eliminating checks and paying salaries through a prepaid card, the companies said. Total System plans to offer these cards to its own employees and will process all the transactions.
Total System is also working with department stores to develop and process their gift card programs and recently announced it will process the holiday gift cards issued by Nordstrom Inc.
Timothy P. Johnson, vice president and director of Total System's stored value solutions, a new department in Columbus, Ga., said stored value is in its infancy and will have "tremendous growth" over the next year.
In 1997, more than one billion prepaid cards were printed and since 1996 gift card sales have grown between 11% and 15% annually, according to Total System. It is estimated there will be 840 million gift cards issued per year by 2005, the company said.
"In general, the public is already aware of stored value cards," Mr. Johnson said. "Prepaid phone cards have really gotten the public's awareness up. But the use of the cards are still maturing."
Mr. Johnson said kids ages 13 to 18 represent a major market for stored value cards. "Generation X and Y groups are very cognizant of these cards and are using them," he said.
Visa said there is still a long way to go before stored value becomes mainstream.
"Checks and cash are still over 50% of the way consumers pay," Mr. Baker of Visa said. "It will be a while before stored value shows up in the equation."
David Robertson, president of The Nilson Report, a card industry newsletter based in Oxnard, Calif., said general purpose magnetic stripe stored value cards will "only ever be a niche market."
In order for stored value to be successful, there needs to be a loyalty program built into the card, Mr. Robertson said. With magnetic stripe cards, loyalty points can only be accrued through proprietary programs, because information is sent from the card to a host computer.
With chip cards, the information resides on the card, so many different merchants can participate in a single loyalty program.
"Chip offers the possibility of a real upside for general purpose type of store value cards because you can build loyalty points into the chip," Mr. Robertson said.
However, it is useful to get started with magnetic stripe while waiting for smart card readers to become prevalent, Mr. Robertson said.
"What you need to do is gain knowledge of how products work, what your market is, how to price," he said. "The chip will just be a change in the system."