The expense of technology conversions will inhibit the spread of smart cards in Europe, a London-based research firm has concluded.

Retail Banking Research, in its first major study of the European payment card market since 1994, said bankers may have to foot the bill if they want retailers' systems upgraded for the advanced technology.

The research firm noted that banks in Austria, Britain, and Germany will soon begin issuing cards with computer-chip memories. The movement began in France, where all bank cards are already "smart," and Europay International, the multinational association affiliated with MasterCard, has committed to a total conversion during the next several years.

But the research report contends that neither cost obstacles nor retailer resistance have diminished, despite growth reported by smart card producers and efforts by equipment manufacturers like Verifone Inc. and Hypercom Inc. to produce transitional terminals that handle both old and new cards.

The report does not directly address the U.S. market, where smart card advocates are trying to prove a business case through several market trials, mostly involving stored-value or electronic purse systems.

"The size of the existing investment in terminals will inhibit a rapid move to chip-reading terminals," said a summary of the report by Retail Banking Research, which is headed by former Battelle Laboratories banking expert Peter Hirsch.

Mass issuance of chip cards "will have minimum impact until a substantial proportion of terminals read the chip," the firm said.

"How this will happen is less clear. Retailers will want to see their existing investments written off (or subsidized) before paying for upgrades or new terminals."

Retail Banking Research estimated that well over a million card- accepting terminals are in place across Europe, amounting to a "quiet revolution" in capturing transaction data electronically. Some countries are more automated than others, leaving "considerable scope" for more terminals.

The study said that in contrast to the United States, where the card processing businesses has become concentrated in a few large companies, European markets are far more fragmented. While no two countries are exactly alike, overcapacity is widespread.

"This overcapacity is being exacerbated by U.S. processors (such as First Data Corp.) seeking to enter and extend their presence" in Europe, the researchers said.

The company estimated 320 million cards were in circulation in Europe as of early last year. It was costing the banking and retailing industries about $4.5 billion a year to run their businesses, handling six billion transactions annually.

In contrast to the U.S., where credit cards are more entrenched, more than half the European cards are debit cards, generating 45% of the transactions and 35% of the sales volume.

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