Thanks in part to the bank credit card associations, as reported in these pages Jan. 31 ("MasterCard, Visa Push Stored-Value Cards"), interest is growing in the emerging area of prepaid and electronic purse cards.
But the involvement of those very organizations may actually be impeding the move toward the more advanced technologies they say they support.
First, one has to ask, what are stored-value, prepaid, and electronic purse cards?
They are machine-readable instruments that contain sufficient information for the transfer of card-carried funds to the acceptor of the transaction. The acceptor starts a process to reduce the available balance on the card and credit his own balance, with appropriate documentation.
Many types of cards act in this way. An automated teller machine card or a mass-transit card satisfies this definition.
What differentiates one card type from another is its technology, security method, and who or what accepts it.
Another question pertinent to these systems and the roles of the bank card groups: How is the transaction authorized?
Authorization techniques range from on-line processes with personal identification numbers to card-contained security devices, encryption algorithms, and digital signatures. Security choices are made according to the transaction values and the relative costs of implementation.
Two sets of players are influential in the prepaid card movement.
The first are organizations that stand to gain through productivity and cost benefits. These include transit systems and mass service and vending environments such as college campuses, toll collection points, and other fee-gathering operations. Banks and merchants are included in this group.
However, no one seems to have made a business case for systems built on small transaction values, except possibly when there is some form of transaction fee, or when float (issued but unused funds) held by the card issuer is factored in.
The second group pushing prepaid cards is the card associations.
Prepaid cards take the member banks' attention away from the concept of smart credit cards - adding intelligent chips to their most popular product.
The credit card establishment fears a precipitous decline - one consultant's estimate is 86% - in on-line authorizations, even though there would be lower fraud and credit losses. Fewer on-line transactions mean lower revenues, and MasterCard and Visa would be left with a 20-year-old authorization network architecture in need of something to sustain it.
Prepaid cards might deliver the needed volume to compensate. They also can offer competition to new payment delivery proposals like Mondex that use new transaction technologies to bypass the aging networks.
In the 1970s, the United States had a National Commission on Electronic Fund Transfers to study the impact of electronic transaction technologies. The post office around that time suggested legislation requiring that every electronic transaction be confirmed by a paper receipt sent through the mail - sarcastically called the Postal Relief Act. It didn't succeed and EFT became a reality.
The card associations are playing a similar game of self-preservation. Their move to prepaid cards and the capture of new transaction types serves to postpone the realities of smart credit cards.
Smart card technologies can reduce the current credit card networks' roles by 80% to 90% while cutting the member banks' losses and expenses. Isn't it time for the banks to demand the move to the next generation of technology, because it is in their economic interest?