There is a radio commentator who is famous for telling "the rest of the story" - which often turns out to be more important and interesting than the original report.
That is what comes to mind now that the chief executive officer of Visa International is telling the banking world that multiple-function smart cards can be economical-only 1.3% more than the cost of current card programs. (See commentary by Malcolm Williamson, May 26, page 12.)
To start with, multiple-function is a card association code word. The current magnetic stripe card is also multiple-function, usable for many applications and in many industries.
However, all usage is funneled through the association network. This keeps the association in charge of business relations, usage charges, and decisions on which applications are acceptable.
The real payoff to smart card issuers will be the multiple-application smart card, designed to allow card acceptance through an array of point of sale units, networks, and data bases. In each application, the card- acceptor device finds the relevant application data in the card's chip and processes the transaction through the application provider's system.
That is an important economic difference. The multiple-application card allows the issuer and the acceptor to set the business rules, charges, and system economics. The established card associations cannot afford to lose the economic earnings of their control of the card acceptor rules and charges.
Now the rest of the story-about the benefits not being emphasized in Visa's recent pronouncements about the infrastructure:
Reduced losses-lower bad debt and fraud from improved controls of the smart-card-based credit account.
Increased revenues-more credit-eligible cardholders, thanks to the control features programmed on smart cards.
New revenues-renting logo space to various application providers, which rely on the chip to control each card relationship and use.
Reduced system costs-local decisions and batch data capture with smart cards affords better controls and lowers losses compared with the current magnetic stripe-based system.
Increased service opportunities-more authorizations will be needed to handle the added cards and card applications.
New card marketing-everyone can get a card with usage-growth capacity built in and awaiting electronic activation. This is far less expensive than reselling, reissuing, and reinitializing each card application.
These attributes are interesting and valuable in themselves, but certain facts of credit card association life need to be addressed.
For example, how should these organizations charge for services? The fees from central on-line authorizations would disappear as more decisions are made between the multiple-application smart card and its card acceptor.
The most likely scenario will be a per-transaction charge, no matter how the authorization is achieved. That could be 10% to 50% less than the current transaction discounts that merchants pay.
Clearly, the association and participating financial players would all focus on the apparently major revenue impact of such a move, despite the much larger opportunity in new revenues from smart cards.
How should the associations and member banks split the increased revenues?
If they were clever, the associations would tie their revenues to improved performance of the multiple-application smart card business. More credit card holders and users, increased revolving credit, more card-logo sales revenue, lower losses, and so forth should contribute to earnings.
Most of the business world thrives on incentive-based contributions to business growth and expense reduction. I would hope that the associations would be big enough to put their plans where their mouths are.
There is another "rest of the story."
MasterCard and Visa have known about these smart card attributes since they did a combined study in 1987. The conclusion then was that the smart card was uneconomic, but there was no factual case to support this.
The project leader said hard system-cost reductions were not factored in because it was assumed that the existing network was already bought and in place.
What about the savings in further network expansion? My question was never answered. The smart card economic model has not changed since 1987. Mr. Svigals, a consultant, is head of Jerome Svigals Inc. in Redwood City, Calif., and author of the Lafferty Publications report Smart Cards 2010.