Although the banking industry soundly rejected smart cards in the 1980s, some U.S. banks are starting to warm up to them.

Banc One Corp., Citicorp, and a few other technology bellwethers are aggressively testing the cards, which look like regular plastic cards but contain powerful computer chips.

So far, overall usage remains very modest. And no one is predicting a sudden or dramatic shift.

But smart cards hold the promise of being more flexible and secure than their plastic counterparts. And the institutions pursuing them clearly think they are in on the start of something big.

While American bankers, on the whole, were not paying attention, the chip card made major advances, especially in France and Japan. Some technologists claim the card has come cheap and versatile enough to overcome the objections raised during the intensive U.S. debate of the mid 1980s.

The combinations of advanced card technology and electronic marketing is intriguing," Mark Tonneson, a Bank One Columbus senior vice president, said last month when announcing a smart-card program with a Florida-based consumer marketing company.

For a product under development at CoreStates Financial Corp.'s Money Access Service, "we found [the chip card] offered the best tradeoff of price security, and flexibility," said Joseph Donofrio, vice president of product development.

"On the economics alone, in its ability to drastically reduce fraud and credit losses, the technology can be justified," said Lawrence Ladouceur of MasterCard International.

"In the 1980's we said it would take five and a half years to pay back an investment in smart cards" Mr. Ladouceur said. "Given today's economics, it would take only one and a half years."

No Takers

That argument may be compelling in light of the bank card industry's $1 billion-a-year fraud problem. Touted as a solution are the logic and memory in the chip, which holds far more information and is more difficult to counterfeit or manipulate than the magnetic tape on current cards.

But the microprocessor is also more expensive, and MasterCard is having no more success getting its point across than it had as the self-appointed champion of the smart card in the last decade. Mr. Ladouceur, a vice president of advanced technology who had hopped to be implementing smart card systems by now, has been reduced to monitoring accomplishments by others, mostly in other countries.

CJS Consultancy, a British firm, estimates that smart cards make up about 200 million, or 5%, of the 4 billion plastic cards in use worldwide.

The vast majority of smart cards are in Europe and Japan, and are as likely to be for mass-transit or telephone systems as for electronic banking or point-of-sale payments.

"Outside of the U.S. government [which has found uses for the card in the military, crop-subsidy programs, and welfare-type payments]. you have to search pretty hard to find a significant chip card project" in the U.S., said Mr. Ladouceur.

Yet a growing number of the American bankers MasterCard struggled to convince in the 198s are moving into the fold:

* Banc One is preparing to pioneer chip-equipped credit cards in the United States. Banc One has formed a smart-card alliance with Advanced Promotion Technologies of Deerfield Beach, Fla., which sells a high-technology frequent-shopper marketing system to several major supermarket chains.

* Citicorp, which has been eyeing smart cards for years in its extensive research and development activity, is incorporating the technology in its test of computerized home banking.

* CoreStates' MAC payment-system unit in Philadelphia has chosen the smart card for its Moneypass, a prepayment, or stored-value, card designed to replace cash in low-value transactions.

In a conventional magnetic-stripe version, Moneypass has been tested this year by CoreStates employees in telephones and other transaction devices equipped to delete value that has been stored in the cards. Mr. Donofrio said Moneypass will be introduced in early 1993 throughout the multistate territory covered by the MAC automated teller machine network.

With overseas developments -- such as the adoption of smart cards by the entire French and Norwegian banking systems, or Guatemala's ambitious plan to build a national electronic payment system around these devices -- banks clearly are moving at least part of the way toward MasterCard's vision of chip-based payment systems.

Visa in the Act

Even Visa International, which led the resistance to MasterCard's chip-card push, has contributed to the body of knowledge with its Super Smart Card.

Produced by Toshiba Ltd. and tested among employees of several major Japanese companies, the super card has the look of a palm-size computer, complete with tiny key pad.

Visa shelved its three-year test of about 450 cards at the end of 1991, said spokesman Mike Sherman. But not before it proved that the smart card can be much more than a juiced-up credit card. It included a calendar, foreign exchange calculations, and an electronic notepad.

Card with Many Functions

Some advocates of the technology, notably the retired IBM Corp. banking expert Jerome Svigals, are promoting the idea of multipurpose cards: credit, debit, car rental, frequent flyer, frequent shopper, health care records and payments, etc., all in one package, which the high-capacity, programmable memory chip makes possible.

Mr. Svigals, a consultant based in Redwood City, Calif., says a fee-income bonanza awaits any organization that can put that package together. He warns that unless one or more banks seize the opportunity, a telephone company or industrial company will.

In Germany, he points out, Lufthansa offers a card with full travel and entertainment capabilities plus telephone access.

Joint Ventures Desired

Robert Haddock, a New York-based consultant, wants the diverse service providers to design and standardize a new infrastructure, which could embrace the single-card idea. Mr. Haddock formerly headed Citicorp's Enhanced Telephone home banking project, currently being tested in a few hundred households, to which he added a smart card component.

"As long as service providers think in terms of individual applications, implementation of smart cards will go slowly" and returns on investment will be meager, Mr. Haddock wrote in a paper for a recent industry conference.

CoreStates' MAC unit set out to be the U.S. pioneer of stored-value cards, but it did not want the cards limited to a single use like the pay-telephone chip cards that have become common in France. CoreStates enlisted Bell Atlantic, the regional phone company, and ARA Services, the food services company, to participate in its pilot and prove that an open, or multipurpose, system is viable.

Advanced Promotion Technologies, which began its test-marketing in 1988 and announced a tie-in with Banc One on June 2, may be on the leading edge of multipurpose joint-venturing in the U.S.

Among APT's backers is Central Bancorp., the Cincinnati subsidiary of PNC Financial Corp. It has a relatively insignificant, passive stake in APT, according to Central Trust Co. vice chairman Clay Stinnett. But Central has some big-time investment partners, including Procter & Gamble Co., Dun & Bradstreet Corp., and the French-owned smart card manufacturer Schlumberger.

In a few dozen Kroger, Dahl's, Safeway, Super Valu, and other supermarkets participating with APT -- the number is on its way to at least 2,000 -- consumers are invited to join the Vision Value Club. They are given a smart card that keeps track of frequent-shopper points, which can be applied to gifts and other fringe benefits.

Based on what the system "learns" about a cardholder, it can play an appropriate commercial on a video screen in the checkout lane, and provide an instant discount or print a cents-off coupon.

That is known as micromarketing, which, with the loyalty engendered by frequent-shopper points, is seen as a consumer-product marketer's dream.

Built into the Vision Value system is the capability to guarantee checks or handle direct debits or credit card transactions, which is where Bank One Columbus comes in.

Undeterred by the involvement of its competitor PNC, the Banc One unit plans to issue MasterCard and Visa cards with all the Vision Value features, "maybe by the fall," said John Russell, senior vice president. The bank began testing last month at a Big Bear store in Columbus.

Ignored by Most Bankers

Yet American bankers still generally shy away from even a cursory exploration of smart cards and how they might fit in the grander scheme of consumer services. Only a handful attended the Advanced Card Technology Conference in April, co-sponsored by the Washington newsletter Personal Identification News, though much of the proceedings covered banking and payment applications.

APT marketing vice president Debbie Coller, speaking to that meeting in Crystal City, Va., said her approach allows customers to carry "a club membership card, check-cashing card, debit card, and credit card, all in one smart card" -- a prospect that might make credit-card-happy bankers nervous.

Mr. Haddock, the former Citicorp official who now heads M-Power Corp., New York, said card-activated phone banking could make it "no longer necessary for a bank to invest in costly bricks and mortar to offer many kinds of banking services."

Because smart cards represent a major leap forward in memory capacity and in the ability to verify the cardholder's identity, "we can now have banking that is highly convenient and secure," Mr. Haddock said.

Magnetic Stripe Won Out

Some observers blame the MasterCard-Visa feud for confusing the issue. Though it is four years since the card associations put their smart-card debate to rest, the standoff they reached left a widespread impression that the best course was to do nothing.

Consultant Arlen R. Lessin, one of the early American smart card advocates, pointed out that in the decade after the card was invented in France in 1974, most bankers compared the unit costs of chip cards with those of standard magnetic-stripe cards, and the numbers were unconvincing.

He believes literal price comparisons obscured the true worth of smart cards, in terms of security and new-business opportunities like CoreStates' Moneypass.

Magnetic-stripe cards in the 1980s cost well under $1 per unit, chip cards several times that, at best. The notion of adapting card-reading terminals all around the worlds to accommodate the embedded chip seemed even more daunting. The retooling of card-based payment networks would certainly run into hundreds of millions, if not billions, of dollars.

"Unfortunately, the smart card came along just as the banking industry was committing itself to the [magnetic] stripe after 15 years of resisting that," Mr. Lessin said. "If the smart card and mag stripe card came along at the same time, there is no question in my mind -- and a lot of other people's -- that the smart card would be seen as the superior choice."

Costs More Favorable

Mr. Lessin contends that terminals can be adapted for smart cards today at a cost of well under $100 a unit. Mr. Ladouceur of MasterCard quotes a price as low as $12.

Thanks to technical advances and mass production, the cards themselves can be as cheap as a magnetic stripe card, or as much as $25 for an advanced, multi-application type like the Visa super card, Mr. Lessin said.

For Moneypass, MAC decided it was worth paying for the chip card and the antifraud protection if affords.

"Bankers in this country have not decided, as they did with ATMs, that this is they way to go," Mr. Lessin said. "But if you look at the smart card's features, and what it has been able to accomplish where it has been used, it is clear that there are real and substantive values that can help banks, especially in this crunch time and against the difficult competition that lies ahead.

"I'm not saying it's the answer to all their problems, but it certainly can help."

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