The cost comparisons often made between chip and magnetic stripe cards are misleading. You must raise the debate to a higher level to see that credit cards with chips are a potential gold mine for issuers.

A jet plane is many times more costly than a bicycle, but there are good reasons why the transportation industry has invested so heavily in advanced engineering and equipment: carrying capacity, speeds, and low costs per passenger mile.

The same kind of thinking about smart cards will yield similar advantages and cost savings.

Some critics raise concerns about the cost of retooling the credit card infrastructure. In fact, it is replaced regularly. In the United States, for example, the average life of a card is 16 months. Card-accepting point of sale terminals are replaced every five years, automated teller machines every eight years.

These factors encourage a migration to a next generation of technology.

The accompanying table pertains to aspects of the payment system that are unique to the credit card and its interfaces.

The smart card interface cost assumes one terminal is required for each 150 cards issued. The cost of the interface is $100 per month, assuming a 60-month useful life, divided by 150 cards.

The length of the smart card's life is based on an international standards group's judgment, attributable to the chip card's high reliability, security, and ability to change content dynamically. Conversely, the magnetic stripe card's life is shortened to keep delinquencies under control. In the smart card, that function can be performed by the internal logic without shortening its life span.

The payoff for the switch to smart credit cards is in cost reduction, cost avoidance, and additional revenue.

Using data from a Booz-Allen study for MasterCard and Visa, for each $65 average credit card transaction, monthly fraud at a 0.5% rate would come down by 22%, to 7 cents. Bad debt at a 3.5% rate would fall 7% a month, to 16 cents.

The 23-cent cost reduction translates to a 135% return on the smart card's 17-cent monthly overhead. On pro-rated card costs of 6 cents, the return would be 385%.

This does not include savings in on-line authorizations or telephone- line costs. In France, on-line central authorizations have been reduced 90%; the Mondex transaction model eliminates on-line authorizations entirely.

Smart credit cards substantially reduce the need for central-site authorizations, while lowering losses. I project that a one-half reduction in the card associations' 0.5% transaction fee could be offered in return for a 90% reduction in required on-line authorizations.

As for revenue enhancements, they can be expected from extending credit lines to more customers, sharing the card-issuing costs with others participating in the system, and collecting "rent" from other companies providing applications on the same card.

Profits clearly beckon in multiple-application smart credit cards. Will they accrue to banks or will others seize the opportunities sooner?

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