First Union Corp., one of banking's few proponents of smart card technology, is pulling back from the business of smart card issuance, citing a lack of profitability.
The Charlotte, N.C., banking company said it will discontinue its two Army base smart card programs with the Treasury Department by yearend and has put the brakes on other stored value projects. First Union has issued Visa Cash cards to recruits at the Fort Leonard Wood training base in Missouri since 1997 and began a similar program at Fort Benning in Georgia last March.
The electronic purse part of the programs was not profitable, said Lou Anne Alexander, vice president and electronic-channels product director at First Union. "We are not continuing the programs where we are actually running the back-end merchant processing and clearing."
First Union's retrenching is yet another setback for a product that has had trouble gaining momentum in the United States. It also may be the reason behind the resignations of two well-known executives.
Michael G. Love, hired in 1996 to manage First Union's smart card programs, resigned in December. Sources close to Mr. Love, who declined to comment, said he is evaluating opportunities that might include a start-up venture with an Internet company.
Edgar D. Brown, who built First Union's smart card department and spearheaded its stored value trial at the 1996 Atlanta Olympics, left the company last February.
Both men had worked closely on the Olympics project with Diana Knox, senior vice president of chip products at Visa U.S.A., and Visa partnered with First Union on the military pilots. Neither Mr. Brown or Ms. Knox could be reached for comment.
According to an industry source who asked not to be identified, First Union, like many banking companies, is focusing its technology efforts on the Internet. In First Union's case, the new Web strategy does not include a focus on smart cards, the source said. David Carroll, who has worked at First Union since 1981, was put in charge of First Union's Internet activities last May in the new role of chief e-commerce officer.
Gary Grippo, electronic money project manager at the Treasury, said he was disappointed with First Union's decision to quit the smart card issuing business.
"First Union was an excellent provider, and we had anticipated doing more stored value and smart card work with them," Mr. Grippo said.
The government has made a major commitment to smart card technology and is continuously looking for commercial banks to supply it with chip card infrastructure, Mr. Grippo said. The Department of Defense has been appropriated up to $40 million to spend on smart cards for 2000, and the government plans to issue about 400,000 cards this year.
The Treasury is working on smart card projects with three other banks - Mellon Bank, Bank of America, and Wachovia Corp. - and is looking for another one to take First Union's place.
Mr. Grippo said plenty of banks are still interested in developing smart card projects with the government, but that in general they are growing more skeptical of the prospects for chip technology.
"Banks are getting a little more hard-nosed about what the market opportunity is," Mr. Grippo said. "It has not developed according to the projections of two or three years ago."
Ms. Alexander said First Union is still interested in programs that would allow it to establish and strengthen banking relationships with customers with smart cards. It is working with the Washington Metropolitan Area Transit Authority on an automated teller machine function for a cobranded fare card with a chip.
"Our interest in smart cards is still there," Ms. Alexander said. "What we're not interested in are these closed environments where there is limited opportunity to expand that chip card relationship into other financial products."
Duncan Brown, the director of research for North America at Ovum Inc. in Burlington, Mass., said smart card projects take eight to 10 years to make money.
"This is why financial services using smart cards is such a difficult business case," Mr. Brown said.
First Union said it is still looking into various chip programs but has not committed the funds to run them. One area of interest is loyalty programs involving discounts and other benefits, Ms. Alexander said.
Theodore Iacobuzio, senior analyst at Tower Group, a research firm in Needham, Mass., said he is not surprised that First Union is "drawing in their horns."
"How much revenue can a bank do handling the payments on an Army base or at a college campus?" Mr. Iacobuzio said. "There has to be an opportunity for the card to act both in the closed system and in the larger economy."