In a recent, politically charged panel discussion on the merits of competing smart card technologies, executives of American Express and MasterCard reached back into history for a couple of big guns.
They drew quotations from strange bedfellows-Niccolo Machiavelli and Mahatma Gandhi-which seemed only fitting for a feud that can sound at times hopelessly technical and divisive, at others civil and diplomatic.
As reflected in the discussion at the Cardtech/Securtech West conference, Visa International has placed bold bets on a couple of technology specifications, including one based on the still evolving Java Card standard from Sun Microsystems Inc., in full confidence of winning ample future rewards.
MasterCard International and its Mondex subsidiary, with a well evolved and documented standard of their own already in place, remain steadfast in questioning and opposing just about everything Visa does.
"Honest disagreement is often a good sign of progress," said Gandhi as invoked by MasterCard senior vice president Richard Phillimore.
American Express Co., not being an association but rather intent on asserting its own instincts and interests as a card issuer, sees some merits on both sides and argues for ever more "openness" among the technologies.
It was W. Jody Gray of American Express' smart card center of excellence in Salt Lake City who read from Machiavelli's "The Prince": "There is nothing more difficult to carry out, nor more doubtful of success, than to initiate a new order of things. For the reformer has enemies in all those who profit by the old order."
No wonder the convergence toward a common operating platform has been deemed inadequate by just about everybody who cares. Even though plenty of agreement in principle can be gleaned from MasterCard and Visa public statements, they have not yet dealt with specifics at the negotiating table.
Nor is the current state of affairs anywhere close to the open-standards principles espoused and embraced in other corners of the technology world.
Somehow, the struggle between the beta and VHS videocassette standards got resolved-in favor of VHS and at considerable cost to Sony Corp. and its Betamax strategy.
Somehow, DOS and later Windows became de facto standards for personal computer operating systems, and the rest is Microsoft Corp. history.
Somehow, entertainment industry rivals will come to agreements in mutual interest for delivering music and other copyrighted content over the Internet and on new media like digital video disks.
Unless the bank card organizations similarly draw the right line at where to agree not to disagree, they are in danger of perpetuating the kind of "standards war" from which "there could be no winner," said University of California professor Hal R. Varian.
"There can be such a thing as too many standards. It can stifle innovation," said Mr. Varian, dean of U.C. Berkeley's School of Information Management and Systems and co-author of the recently published "Information Rules: A Strategic Guide to the Network Economy."
Mr. Varian made that comment after delivering a speech to Cardtech/Securtech West. Conference chairman Ben Miller gave Mr. Varian a keynote slot at the San Jose, Calif., meeting for an obvious and pointed reason. Mr. Miller wondered later whether the message was heard.
"We need to step back and evaluate some of the issues that affect how the technology will be rolled out-and whether it will be rolled out," said Mr. Miller, who has been running the Cardtech/Securtech conferences for seven years and sold his company to the newsletter and magazine publisher Faulkner & Gray a year ago. (Faulkner & Gray is a subsidiary of Thomson Corp., as is American Banker.)
Mr. Miller said the smart card industry has had considerable success "serving closed environments," whether college or corporate campuses or city transit systems or other relatively confined networks where electronic purses, with monetary value stored in the cards' chips, are accepted as cash replacements. A billion chip cards are being produced annually, and they can be used at 100 million "access points" such as phones and payment terminals.
Yet this is "an industry preparing to be much more," he said, with multiple applications on single cards, with cross-system and cross-border interoperability, and "massive infrastructures that will drive modern commerce-and modern society for that matter."
For these thus-far elusive dreams to be realized, "the requirements of a networked society apply: low cost, reliability, and ease of use," Mr. Miller said.
Thanks to the Java Card specifications and the coming in 1999 of Microsoft's Smart Card for Windows operating-system extension, millions of programmers will be working on these challenges, and the smart card provider population should explode. "It will be very good when all the vendors don't know everything out there that is being developed," Mr. Miller said.
But as the development boom takes off, conflicts still abound in the messages emanating from the bank-owned organizations that are in the middle of that drive from closed and limited to open and interoperable infrastructures.
Aside from the momentum of Java, to which it has hitched its Open Platform strategy, Visa can cite big numbers in its favor. Well over 20 million chip cards are in circulation from Visa member banks worldwide, while Mondex is still around one million-though there may be an apples-and- oranges aspect to this comparison.
In a Cardtech/Securtech presentation, Visa International senior vice president Gaylon Howe focused not on Open Platform but on CEPS, the Common Electronic Purse Specifications that Visa began promoting in Europe this year as a proposed common ground for stored value applications around the world.
CEPS is a key to "mirroring the magnetic stripe world while delivering on the promise of the chip," Mr. Howe said.
Visa and American Express are both part-owners of Proton World International, which, with the Geldkarte system of Germany, forms the essential 80 million-card nucleus of CEPS. The specifications are to be published Dec. 30 and should be in final form, ready for "tire-kicking," in the first quarter, Mr. Howe said.
Organizations in 22 countries, accounting for more than 90% of all electronic purse cards, have rallied to CEPS. MasterCard's European affiliate, Europay International, is committed to helping member banks support CEPS.
But MasterCard and Mondex are holding back.
CEPS is no different from what Mondex has been doing with its electronic cash specification for two years, Mr. Phillimore said. Just as Visa's past proliferation of purse programs lacked compatibility with one another, so too do the various CEPS constituents. Mondex already has the global operational consistency that Mr. Phillimore does not see materializing in CEPS until 2000.
Mr. Howe and his American Express ally, Mr. Gray, conceded that there will be varying "migration paths" to a common purse standard, because the technology is complex and needs will differ from country to country. One of the underlying principles of CEPS, Mr. Howe stated, is to protect past system investments while easing the way to upgrades and eventual cross- border compatibility, especially critical as the euro currency takes hold.
"The marketplace will demand global electronic cash," Mr. Phillimore said. "One product exists today and others will follow. Banks will want to have a choice."
Echoing Mr. Howe on "mirroring the magnetic stripe world," Mr. Phillimore added, "The market reality is that there are two brands, Visa Cash and Mondex, and both have to be accepted at the point of sale."
This agreement, typically, is in principle. To Mr. Phillimore and MasterCard, the logical step would be to rely on EMV-the Europay- MasterCard-Visa agreement on how terminals interact with chips on cards-as the basis for e-purse interoperability. He said the EMV "terminal selection" method proved itself in the Mondex-Visa joint pilot, now being closed down on New York's Upper West Side.
"This is where the quest for standards should end," Mr. Phillimore asserted. He views CEPS as a move toward "standardizing purse functions" and creating "plain vanilla products."
"We don't believe it's in the banks' interest," he said. "We believe it stifles innovation." MasterCard would not go along with a more extensive, EMV-based proposal by Visa because "that would have led to a single product."
In a dig at Mr. Howe and Visa's superior numbers, Mr. Phillimore pointed out that excluding Proton and Geldkarte, CEPS does not look so imposing. Of course, Visa's lead in credit card market share would not look so great either if, say, the United States' statistics were taken out.
"We are comfortable that many banks are making commercial decisions to buy Mondex franchises and licenses because they believe it is state-of-the- art e-cash," Mr. Phillimore said. "We have sold Mondex in France and expect to do so in other European countries."
American Express turns out to be a voice in both wildernesses. It is a licensee and co-owner of Belgium-based Proton. It is also a member of Maosco Ltd. of London, which has taken custody of the operating system that underlies Mondex. MasterCard, Mondex, Dean Witter Discover & Co., Europay, and several technology vendors are also on board.
The Maosco group concedes nothing to Visa and Java in terms of adherence to "openness." Java programs can run on Multos, for example, and licenses are freely offered. "How can it be seen as proprietary when it is backed by 11 companies?" asked Maosco Ltd. vice president Hugh Kingdon.
Mr. Gray said American Express is certain that "e-purse cards that are not interchangeable will not be acceptable to consumers ... The costs of multiple proprietary systems are too high and will not allow for consumer and merchant support on a mass level."
This explains why Amex embraced CEPS through Proton and why it was the first nontelecommunications company to join the Global Chipcard Alliance, a pro-interoperability body that has since been joined by Citibank, MasterCard, Mondex USA, Visa, and others. American Express has offered its own T&E File Structure to the rest of the travel and entertainment industry to promote efficient customer profiling and transaction processing.
Rather than on technology, Mr. Gray said, competition should focus on products, services, pricing, and brand.
In search of the right formulas, he added, Amex intends to run a CEPS purse on the Multos operating system, and over time will utilize others.
"We see the lack of standards and interoperability as the primary obstacle to making the electronic purse enable an alternative payment system on a global basis," Mr. Gray said. "Being on the bleeding edge has been painful when it comes to e-purse."
Mr. Varian, the Berkeley dean, said technology standards have historically evolved either by war or alliance-though the smart card case looks more like a war between alliances.
"If there are a lot of network externalities," he said, referring to phenomena like fax machines and e-mail that increase in value along with their number of access points, then it is usually best to "give peace a chance."
When such "network effects" operate, competitors put aside some basic differences on the theory that "all will be better off by slicing" a much bigger pie.
Mr. Varian, in his book with Berkeley business professor Carl Shapiro, wrote, "Whichever player can figure out the most-effective way to generate multiple revenue streams from an installed base of smart card holders will be able to bid most aggressively, but still profitably, to build up the largest base of customers."
"Exploit the fact that there is a big potential market" for smart cards, Mr. Varian told Cardtech/Securtech. "Start small-in telephones, transit, or campuses-but it is those little pieces that can allow you to get to a big market."
Looked at in that way, Mr. Miller said, incremental developments that are not rousing market successes, such as Visa's 1996 Atlanta Olympics trial or the New York City pilot, over time fall into place as "important building blocks" toward a critical mass.
Mr. Gray said that only through standards can smart cards meet five critical consumer needs on a global scale: ubiquitous acceptance, convenience, value, security, and privacy. "If we don't meet those needs, we will fail."
