A 1987 study commissioned by the MasterCard and Visa associations projected that a move to chip-based credit cards would reduce on-line authorizations by 86%.

This potential shift in transaction loads and network economics has dampened the card companies' enthusiasm for smart credit cards, but they are overlooking the new opportunities they afford.

The decline in authorization calls was possible because there would be sufficient account data, credit control logic, and personalized controls within the card's chip to authorize most of the routine credit card transactions at the card-accepting terminal.

The remaining 14% of the transactions required on-line authorization inquiries against the card-issuer data base system.

These on-line versus off-line numbers were experienced in an early bank card test in Florida in 1984. For the past six years in France, where chips are standard in bank cards, there has been a 90% reduction in central on- line authorizations.

In either the projections or actual French experience, the net result was a reduction in bad debt and fraud losses compared with the current system based on magnetic stripe cards and on-line credit authorizations.

The bank card associations' study projected a 22% reduction in bad debt and a 7% reduction in card fraud losses. The French have experienced an annual 10% reduction in losses, or 50% cumulative since the current technology was adopted.

Underlying the remuneration to the bank credit card infrastructure is a merchant-paid discount for each transaction authorized on-line through the networks. A 90% reduction in central authorizations would represent a serious loss in revenues to the banks and associations that split the fees. That amounts to $7.5 billion among the merchant's bank, card-issuing bank, and the associations.

If that is a prime source of revenue, as it is to the bank-owned card associations, 90% would be a big hit.

A recent study by my organization, the Smart Card Institute, found this conclusion to be simplistic. Neither the original study nor the subsequent French experience took into consideration the multiple-application potential of a smart card. Credit could be one of many services on a microprocessor-based card.

The multiple application credit card introduces several new sets of on- line transactions that substantially increase the need for the association networks. These transactions could include debit card authorizations, cash card refills, credit card authorizations for new personalized-credit customers, other application authorizations (e.g., health, reservations, etc.), on-line application updates and activation, and access to open systems such as the Internet and cellular telephones.

These add-on transactions are estimated to produce a net growth of 50% above the current on-line volume on magnetic stripe credit cards. The model that yielded this estimate takes into account a 90% reduction in routine credit card authorizations.

The planning model for projected new on-line use is available. The failure of the card associations to set a time line for achieving multiple- application smart credit cards is denying them and their constituent members of new revenue and volume opportunities.

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