When innovations come along they tend to be described as new technology for an old solution. Then they move into a second stage, where they give rise to and exploit a more fundamental change.

The smart card, a conventional bank or payment card with an embedded microprocessor chip, are moving into a second stage where they could have a major impact on the basics of the transaction business.

This second stage involves the cards' multiple-application capability. As just a stored-value or cash-replacement device, the smart card offers productivity benefits and reduces theft and vandalism losses. But even with 27 billion prepaid transactions being conducted annually, no stored-value applications are known to be profitable.

The alternative is to use the smart card as a profitability engine. The costs of a multiple-application card can be shared across many providers and functions, and the returns can be as promising as those on credit cards.

On a single chip card can be telephone, car rental, frequent-flier, health insurance, and other credit or information applications. The service providers could pay "rent" for their logos on the cards - and now the returns can exceed those on credit cards.

In addition, there is the idea of a "controlled revolving credit card." The smart card processor, internal logic, and personalized controls and limits make it possible to offer credit, reliably and profitably, to a currently underserved group of customers. Nedcor Bank in South Africa has done just this to attract four million customers who did not qualify for conventional credit cards, and brought it $2 billion of profitable balances as a result.

The card industry as a whole remains locked into business definitions that are 25 or more years old. For example, the magnetic stripe was adopted for credit cards because of its standard use in computer systems in the 1960s. It worked well, but the systems world has moved on. Now the smart card is available, a pocket computer.

In France, where 23 million smart bank cards are in circulation, credit authorizations are made "on the card" 90% of the time; only 10% of transactions must be routed to a central site, incurring telecommunications expense. What's more, loss rates are lower than in "100% on-line" systems.

Here is some what the smart card makes possible:

*Local on-line. The computer in the card makes transaction decisions at the point of transaction. Data are captured for later batch transmission to a centralized collection site.

*Wider extension of credit. Credit can be extended to virtually anyone through reliance on the card's internal computer logic to set and monitor the necessary limits. If limits are exceeded, the card-reading terminal will automatically go on-line so that action to be taken centrally.

*Lower costs. Industry studies and the French experience indicate that smart cards reduce credit losses 7% and fraud losses 22% and have a lower cost per transaction and longer life span (36 months versus an average 16 months) than magnetic-stripe cards. And this is all before multiple- application and logo-rental revenue opportunities.

The shift to smart cards is an incremental expense. Automated teller machines and point of sale terminals are replaced over four to eight years. A shift to smart cards would lessen on-line transaction volumes, and most authorizations would be completed locally with personal identification numbers. Citing PIN-based ATM transactions, the Justice Department has seen a reduction of 35 to 50 times in card transaction losses through use of PIN validation.

*A card for everyone. Reversing the selective credit card approach, everyone can be given a smart card and a menu of its multiple applications. Each desired application would be activated as the consumer desired it and became eligible for it.


The hazard for financial institutions is that they may not be the card issuers, though they may need to be the financial application provider.

They could play the central, potentially lucrative role of card issuer - but only if they get behind and issue the smart card.

Just as wars were said to be too important to be left to the generals, smart cards are too important to be left to banks' credit card departments. They deal with a much smaller portion of the customer base than do retail banking departments.

It is the retail departments that deal with a variety of products similar to what will be brought together on multiple application smart. It is time to recognize that the plastic card is no longer just an ATM access device - it is a strategic catalyst in bank evolution.

ATM sharing, interchange, high-productivity branches, and point of sale activity are all direct results of plastic card usage. Smart card technology can extend its reach into the communications world: cable, Internet, cellular, interactive TV, personal computers.

Now is the time for retail bankers to seize the initiative and lead in smart cards. If they don't, others - who lack retail banking know-how and leadership - will fill the void.

Mr. Svigals, a smart card advocate and consultant, heads Jerome Svigals Inc., Redwood City, Calif.

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