Many industry analysts propose that smart payment cards are finally poised to change the future of payment and financial services aggregation.
By combining a secure and portable payment platform with a selection of payment, financial, and nonfinancial applications, the smart card's reach may go beyond the traditional debit and credit card business model. In the near future, both consumer and business cardholders may be able to choose from a variety of smart card-enabled, lifestyle-driven features and to use the card with their PC, mobile phone, or other Web-enabled device.
The race is on to issue these multiple-application cards while continuing to develop new smart card programs and features. Over the past 18 months, American Express Co., Visa U.S.A., and MasterCard International have launched multi-application platforms. The Nilson Report estimates that card companies in the United States could issue 35 million cards within the next three years. Visa International has said that as much as one-third of its card base will be smart cards by 2002.
While the potential customer benefits from smart card technology are significant, several things may inhibit the success of the smart payment card market. Most fundamentally, to enable applications a smart card infrastructure consisting of new hardware and software must be built. Card associations and issuing banks are investing heavily in the required technology and infrastructure. However, merchant participation is moving slowly.
Customer acceptance of smart cards is the near-term key to future market success. A sufficient pool of cardholders helps solidify the business case for merchants. Concurrently, card issuers and vendors must address concerns about privacy, the type of information stored on the card, and interoperability.
Though the future of smart cards is uncertain, issuers must develop an explicit strategy. At a minimum, use of smart cards for customer acquisition will continue to grow. In the optimistic view, they could become the payment platform of the future, supporting brick-and-mortar, Internet, and wireless payments combined with an assortment of additional storage and processing features.
Regardless of the outcome, it is crucial that issuers prepare for either of these possibilities. We believe there are four key actions every issuer should take:
- Analyze the opportunities and threats posed by smart card technology and its impact on existing delivery channels.
- Identify key-player market activities.
- Determine the appropriate level of market participation.
- Create an action plan that addresses the organization's strategy.
- Current smart card strategies are little more than image-based marketing campaigns to increase direct-mail response rates. As a result of the technology-limiting infrastructure supporting today's smart cards, chip-driven benefits take a back seat to the aesthetic and image appeal of a computer chip-embedded card.
Even with their current status, there are three reasons why smart cards may represent an important future approach for financial services delivery and aggregation:
- The card provides increased security and information storage well beyond traditional credit card capabilities.
- Cardholders can download additional software. This will allow card issuers to mass-customize smart card features.
- Cardholders will be able to open their wallet, insert the card into any smart card-enabled PC, wireless device, or Web-enabled terminal, and manage their finances.
A basic multi-application smart card benefit is the ability to consolidate payment functionality with software applications and programs tangential to payments. The card-based smart payment application provides the highest level of payment security available by authenticating both the card and the cardholder. A card cannot be used unless activated by the authorized cardholder with a unique identifier, such as a PIN or biometric scan. After the cardholder's identity is verified, the card authenticates by appropriately encrypting and decrypting secret messages in accordance with the system software.By layering additional applications onto this secure payment platform the card becomes a payment-related activity hub - a secure control panel from which a cardholder manages financial transactions and transaction-related information. Applications such as online wallets, multiple loyalty or reward programs, account/expense management tools, and subscription-based services can be managed or launched from the smart card.
Because smart cards are built on "open architecture" operating platforms, customers will be able to customize their card by adding lifestyle-specific applications. To download applications, cardholders will insert their smart card into a card reader and download directly from the Internet.
While limited in functionality, several smart card applications exist today, with many more proposed for the future. Possible functions include:
- Merchant discounting applications, providing discounts at the point of sale based on the number of times the card has been used at that merchant.
- Frequent-flier applications, storing an airline mileage number, seat preference, and boarding pass.
- Medical records applications, storing health insurance-related claim forms.
- Expense tracking - capturing information on business purchases and downloading them into an expense reporting package.
Smart cards' portability lets cardholders make secure payments and manage payment-related data over multiple channels. Passwords, personal preferences, purchasing history, and loyalty programs are stored on the smart card chip and are therefore always with the cardholder. In this environment, cardholders no longer need to personalize every PC or device used. Automatic personalization can occur when the card is inserted into the reader.Consumers and businesses currently manage their finances using a combination of nonportable tools that are frequently stored or downloaded in one location. As the software industry moves to an application service provider model and as more applications are hosted through the Web than through desktops, smart cards can provide the portable security key, automatically take the cardholder to the site, and provide access to secure electronic files.
Next week: Developing the market for smart cards
Mr. Wendel is president and me, Chinn is a senior engagement manager at Financial Institutions Consulting in New York.