Bankers in France and the United States, poles apart in their past attitudes toward smart cards, are on some surprising common ground when it comes to the hotly debated subject of electronic cash.
They sound equally skeptical about their ability to make money from an electronic purse or stored value service that merely attempts to automate small cash transactions using computer chips on plastic cards.
The similarities may end there, and may not be fully appreciated in these very different banking structures and cultures. The respective countries' bankers seem equally convinced of their correctness. The French, for example, adopted the chip as a security standard, putting it on 30 million debit and credit cards. Their recalcitrant U.S. counterparts fail to see any "business case."
These extremes illustrate how divided the banking world can be in its embrace or rejection of technological innovations. Similarly, some bankers have been much quicker than others to push in the direction of Internet and on-line banking. The Americans consider themselves leaders in this area, but the French are in the forefront of trying to tie the Internet together with smart cards to enhance security and privacy.
In the convergence of thought on the electronic purse-it gets further intellectual support from the MasterCard and Visa associations and other card industry opinion leaders-perhaps there is hope for the unification and standardization that all agree are preconditions for the spread of smart cards.
Just as the United States remains aloof from much of the rest of the world in its coolness toward smart cards, France stands alone among major European countries in its lack of a bank-initiated electronic purse development.
In Belgium, for example, the Proton program is up to five million cards and on its way to seven million by yearend, said Armand Linkens, its sales and marketing director. Systems around the world using the Proton software have issued 25 million cards, more than Visa Cash and MasterCard International's Mondex brand combined. The Geldkarte program in Germany has hit 40 million.
Yet there is an increasingly strong consensus in the smart card field that a simple cash replacement service cannot by itself produce adequate returns on the costs of upgrading the computer payment infrastructure. The answer, many believe, lies in combining many applications or services on a card, such as mass transportation, health care, retailer loyalty, on-line banking-and an electronic purse for small, coin-type transactions.
The French Experience
While many bankers continue to regard stored value as an entryway into the chip business-if not the nucleus of a multi-application package-the French remain singularly unimpressed.
"In all the foreign operations there is a confirmation of French concerns," said Patrick Lecuyer, an official of Caisse Centrale des Caisses d'Epargne, the central bank for the country's savings banks.
"There is only a small volume of payments" in the European purse programs, Mr. Lecuyer said two weeks ago at Interfinances '98, a technology trade show in Paris. "The functionality of small-sum, cash-type payments does not provide a sufficient impetus to electronic purse."
This is not to say that the French lack ideas for finding that impetus. Mr. Lecuyer, in fact, is project director of BMS-Billetique-Monetique Services-which is preparing to test a card that combines electronic purse with ticketing on the Paris buses, subways, and commuter rails. At least two other such trials are in the works, which raises the specter of conflicting and incompatible technical standards, though Mr. Lecuyer said his group endorses interoperability principles.
In any event, where e-purse is concerned, France is behind even the United States, where the current focus of experimentation is the Mondex- Visa Cash interoperability trial on New York City's Upper West Side. Chase Manhattan Bank and Citibank have combined to issue about 100,000 chip cards, with customer-usage statistics said to be no better than those in Europe.
Michel Lucas, chief executive officer of Credit Mutuel and president of Europay France, part of the MasterCard-Europay organization, is highly enthusiastic about the chip-the way the French joint card operating company, Groupement des Cartes Bancaires, implemented it.
Since the decision 10 years ago to put intelligence on the cards, and with it a requirement that personal identification numbers be entered to link the cards with their proper cardholders, fraud has been virtually eradicated from the French MasterCard-Visa system. The loss rate of 0.02% on 1997 transaction volume was mostly traceable to activity outside the chip-based infrastructure.
The low fraud rate is "a success story for France," Mr. Lucas said at a press seminar sponsored by MasterCard International. "We are not working on the purse in France because we don't know where the banker wins something. We are not against it. We just don't understand where you can make money."
Mr. Lucas praised the technology of Mondex for being well ahead of its competition. But he also called it "expensive" and said he needs to look more closely at Multos, the underlying operating system touted as a ready- made way to put multiple applications on a single chip. Visa, likewise, has turned to the Java programming language as a potential multi-application vehicle. But bankers like Mr. Lucas are not making any snap judgments.
"We know a lot about debit cards and credit cards," said the Paris-based executive. "Mondex, etc., is the future. We are looking at a lot of systems but it is not clear where we are going. We are looking at purse, but not pushing purse."
The sentiments may sound similar to those expressed recently on the U.S. conference circuit. No less a chip enthusiast than Janet Crane, president of Mondex USA, has said as much about the e-purse business case. Mondex USA has funded a combined stored-value and loyalty-point pilot with several Burger King restaurants on New York's Long Island that could go a long way toward proving the feasibility of that particular combination of services. Mondex International is adding a loyalty system to its product catalogue.
The Security Connection
If the Americans and French have come to the same conclusion about cash on a card, it was by decidedly different routes. The United States still has little chip experience, and none on a national, mass-market scale. It was able to attack credit card fraud by automating the authorization of virtually every card purchase. In the 1980s, when the process began, it was far more feasible in the United States than in France, which had an inferior and more expensive telecommunications network.
"France is now semi-on-line, with low amounts authorized on the card" with PINs and the chip's intelligence, Mr. Lucas said. "We are profiting both from reduced fraud and telecommunications costs. The chip is one of the least expensive systems for (preventing) fraud. I know telecommunications is cheap in the United States, but it still costs the banks a lot of money."
"Our decision 10 years ago was not to go to the smart card-it was to go to the PIN," said Jean-Pierre Camelot, a senior executive of Cartes Bancaires since its founding in 1983.
The further decision to verify PINs off-line, without requiring a centrally provided authorization, led the banks to the chip card, which happened to be a French innovation.
Mr. Camelot also pointed out that despite the placement of chips on cards bearing MasterCard and Visa logos, all but a few million of them are deposit-access, or debit, cards. Many are attached to overdraft lines of credit, but the key point is that the cards are attached to core banking relationships. In contrast to the United States' mass-marketing free-for- all, France is not a heavy credit society. Cardholders customarily sign up for cards from their principal banks and pick them up at branches, where their PINS can be registered on the chips.
Mr. Camelot's organization, known as CB, will have a role in any electronic purse development because, in another contrast to U.S. custom, it has been delegated standard-setting and infrastructure responsibilities by the competing national card associations, Carte Bleue (Visa) and Europay France (MasterCard).
Until recently, they had been pursuing separate Internet security courses, known as C-SET and E-Comm. Now they have converged the specifications, which will fall under the global MasterCard-Visa Secure Electronic Transactions umbrella with one obvious advance-chip card security. Mr. Camelot said he expects smart card readers to be attached to personal computers for less than $20 each. The French should get to such "hardware security" faster than the rest of the bank card world, which is awaiting the next version of the SET standard to do the same.
This all grows out of what the French and other Europeans regard as their strong "interbank" tradition. Something like CB in the United States, effectively a shared back office for MasterCard and Visa, would likely be viewed as an illegal cartel. It clears all domestic card payments, maintains a contractual framework for merchant-acquiring, and performs joint research and development in emerging areas like electronic purse.
"There is total competition among the banks," Mr. Camelot said, for consumer and merchant relationships alike. But the unity on infrastructure matters can simplify technology issues that seem to tie U.S. bankers in knots.
"Banks do things together or not at all," Mr. Lecuyer said.
The fragmentation of the U.S. banking market-not only are the two card associations vigorous competitors, but also their member banks are more numerous and control smaller card shares than do French banks-has caused smart card implementations to be local and "spotty," said Richard Phillimore, senior vice president in charge of MasterCard's chip strategy.
"It is not easy in the U.S. to get bankers together to make a common infrastructure decision," he said, pointing out that Mondex's inroads in Canada and parts of Latin America have been through "national, all-bank decisions."
The United States could join that club as a result of its bank consolidation wave, said Francis van den Bosch, president of MasterCard's debit affiliate, Maestro International. He said if 10 to 15 nationwide U.S. banks wield the kind of payment-system power that relative handfuls have in Canada or France or the United Kingdom, "it will become a lot easier to create new structures to address these issues."
The Business Case
While the politics get sorted out, industry watchers are trying to anticipate when, where, and how the smart card breakthrough will come. The process of elimination usually starts with the stand-alone e-purse.
"There is not a business case for electronic purse, but you probably could have said the same about debit cards, and the French banks had the will to get that done," said Sami Baghdadi, head of the banking and retailing industry segment for Gemplus, the leading smart card manufacturer.
He said, "Loyalty is very big, and there is a lot of interest in the U.S. in replacing couponing" with chip cards. "But I am wondering if home banking may be the driving force, even before electronic commerce. Home banking exists today and we can have a new way of doing it with smart cards. E-commerce is new and may come more slowly."
Mr. Baghdadi said the vaunted business case is particularly strong in the mobile phone business with GSM, the global technical standard that relies on a computer chip to identify and authenticate subscribers.
Gemplus estimated that in 1997, 684 million of the 900 million smart cards produced worldwide were for public telephones. The next biggest categories were GSM, 69 million, and banking, 49 million. The France-based company forecasts a 6.3 billion-card market in 2003, led by public phones, 3.3 billion; wireless, 760 million; and banking, 690 million.
Another application where people are placing bets-transportation-is seen rising from 8 million last year to 240 million in 2003, just behind loyalty (320 million) and access control (260 million). Fare collection systems, like those being proposed for Paris and for a regionwide network in San Francisco currently out for competitive bidding, may be where the transactions truly are.
"The only way to have a business case for electronic purse is to get transactions, and that is why people talk about loyalty and transportation," said David Ankri, executive vice president of Oberthur Smart Cards, Puteaux, France. "It depends on presenting (an appealing proposition) to the end user, which may mean loyalty and transportation together, or loyalty and payments, or a city card" usable in more than a few locations around town.
Mr. Linkens of Brussels-based Proton said he views a combination contact/contactless card-one that can be either inserted in payment terminals or waved at transit turnstiles-as "a crucial need" by 2000.
"The electronic purse can establish the infrastructure" for multiple applications to follow, such as mass transit, loyalty, health care, driver's license data, and electronic benefits transfer, Mr. Linkens said.
Jon Prideaux, senior vice president for new products at Visa International in London, said early attempts at electronic cash suffered because the payments have mostly been accepted in traditional types of retail shops. These were the easiest places for system operators to recruit, but the hardest in which to change consumer habits.
"The advantages over physical cash are at their lowest," Mr. Prideaux said. "Once people are familiar with electronic cash, they will use it in shops," likely to include fast-food sites and newsstands. "But we don't see these as key drivers of e-purse.
"At unattended points of sale, we can begin to see advantages over regular cash," Mr. Prideaux continued. Examples are parking lots, ticketing machines, vending machines, and transit. He said proprietors of unattended locations might also be more willing than traditional retailers to share the costs of automated payments because they understand the benefits.
Mr. Prideaux was speaking before last Monday's announcement that Visa would collaborate with some single-country electronic purse organizations on a common standard. He made a strong pitch for cross-system interoperability, in part through "co-opetition" among competitors.
Interoperability is on everyone's lips in the European payments community, but there may again be disagreements on means to the end. The Mondex camp has continually chided Visa Cash for being a single brand on many incompatible operating platforms-a problem the Mondex-backed Multos- based platform would not have. Mr. Baghdadi of Gemplus said all vendors are hankering for a reduction in confusion through some degree of standardization and said it is encouraging that "people are talking."
Such talk could have to get focused in a hurry because of the phase-in over the next three years of the single European currency, the euro. There is speculation that the European Union might mandate electronic money and purse standards for transit or other applications, and perhaps a standard health care card. It could get complicated-there are more countries in the E.U. than the euro zone-but it could also galvanize purse and related smart card activities in a way that filters out to other parts of the world.
"The problem is that electronic purses are developed for just one country," said Pascal Lagarde, head of the computer and communications bureau in the French Ministry of Economy, Finance, and Industry. "The consumer would like to be able to use his card from, say, Paris to buy a Metro ticket in Brussels."
Mr. Camelot of CB said the cash market, in contrast to MasterCard and Visa, is delineated by national borders. He said he supports an "interoperability solution, as opposed to one dictated by the European monetary authorities."
Linda Moore, a U.S. payment systems consultant now based in Paris, said Mr. Camelot's vision comports with that of Europe as a federation of states rather than a single entity. It could turn out differently, she said, because the European Central Bank has identified the electronic purse as an "agenda item."
"If the European Central Bank doesn't, somebody will have to define an interoperability standard," Ms. Moore said.
In the United States, smart card advocates urge the banking community to seize the day, lest other industries gain control and force the banks to march to their tunes. Europeans, with their interbank tradition, seem more ready on that score. Maybe they have to be, given the immediate realities of smart cards, plus electronic commerce, plus the euro.
"We will try to find a consensus in Europe," said Mr. Lecuyer of the French savings banks. "The systems will have to adopt precise standards and make major security and encryption improvements for the euro. We need multiple applications with the electronic purse, and synergies with transportation will be essential for all European countries."
Telecommunications companies "have standardized their world very effectively," said Mr. Linkens of Proton, an invention of the Belgian banking system. "But there is a standards war in multimedia and no global agreement in transit. We technologists of smart cards have a role to play."