The discontinuation of Target Corp.'s smart card initiative conveys some important lessons for the credit card industry, which had been watching the retailer's program as a kind of test balloon for U.S. chip cards.
Even Visa U.S.A., a major partner in the retailer's Smart Visa program, has conceded that it will not be chasing chip card prospects anymore. In an interview Tuesday, Jim McCarthy, the senior vice president of eVisa member and merchant sales, seemed resigned to putting smart cards on the back burner as a result of Target's decision to phase out the chip component in its 9 million Visa cards.
"We will wait for the market to make a move," he said.
For now, he said, Visa will focus on its 400 million magnetic stripe cards "before I look at the next bright, shiny object" in the form of another chip rollout. Six months ago the San Francisco company reorganized its smart card personnel into a broader product development team, he said.
Though several banks have failed to market smart cards in the past, the defeat of a major retailer like Target, with its winning, populist brand and armory of successful marketing tactics, bodes ill for the prospects of chip applications in the U.S. payment market.
Paul Martaus, the president of Martaus & Associates in Mountainhome, Ark., said Target executives "don't usually fail at marketing - they are too good at what they do."
What went wrong? Observers said that even Target's unique advantages as a mass retailer were not enough to popularize what has proven to be a stubbornly unsellable application.
In June 2001, when the Minneapolis retailer began issuing chip cards and installing readers at 1,000 stores, vice chairman Jerry Storch boasted that the project would "make the market for smart cards in the U.S."
Peter Quadagno, an independent payments consultant in West Chester, Pa., said Target simply failed to generate much customer interest. Mr. Quadagno said he has a Target Smart Visa card but never received any marketing materials about Smart Coupons, the only chip function on the card. (Smart Coupons dispenses shopping discounts.)
In the end, the rather weak coupon program did not justify the presence of a chip application, he said.
One source familiar with the program said Target had planned to eventually distribute coupons automatically to smart card holders at the checkout counter. But those plans were stymied by delays in terminal installation, he said; the retailer's Smart Coupon program was introduced in mid-2003, several months later than planned.
According to TowerGroup of Needham, Mass., Target purchased around 37,000 smart card terminals. (The vendor was International Business Machines Corp.) TowerGroup estimated that the total costs of Target's program were around $40 million.
TowerGroup analyst John Gould said Target may have pulled the plug because the program cost more than expected. "They found it was more complex to run and maintain, and at the same time they were not seeing consumers flock to this as an exciting proposition," he said. A pilot program would have been more cost-effective than a full rollout, he said.
Anneace Haddad, the president and chief executive of the chip card loyalty company Welcome Real-time, said Target made its program too difficult for customers to use. "Customers had to go to a kiosk or plug in a reader, and that takes out the vast majority of customers," he said. "No one wants to wait in line at a kiosk."
The lesson, he said, is that the design and marketing for a smart card campaign can scuttle the whole project. "It was a marketing problem, not a chip problem," Mr. Haddad said. Issuers can "learn from seeing something complicated that customers don't get excited about."
Target declined to say more about its decision than it had said in a statement issued Friday. The statement said that Target remains committed to its Visa card reward program but that "Smart Coupons - the only loyalty program requiring use of the smart chip - experienced limited use by our guests."
The retailer said it "will continue to support Smart Coupons as we build a transition plan to a new loyalty program that will better meet our guests' needs."
With Target out of the picture, American Express Co. is the only U.S. issuer actively marketing smart cards. Though it boasts of high usage of its popular, transparent Blue card, analysts have often observed that few Blue cardholders actually use the sole chip application, ID Keeper, which stores Web site passwords on the chip. They mostly use the card for its good looks, analysts said.
FleetBoston Corp., Citigroup Inc. and First National Bank of Omaha still offer a chip card product, but with hardly any promotion.
In 1999, after Amex launched Blue, nine issuers made plans to issue smart cards, but only Bank One Corp., Providian Financial Corp., and FleetBoston ever officially launched them. Providian canceled its card and refunded card reader fees to customers. FleetBoston has placed its card program on hold. Bank One no longer seems to offer the card but the company will not discuss its official status.
