Are merchants ready for smart cards?

One newly released study says yes. Almost half of the merchants who participated in a survey said they would accept smart cards with stored value from customers.

The number practically doubled when the merchants were assured that economic and technological issues would be resolved, leaving only 8% of the respondents saying they would not accept smart cards under any circumstances.

The study, conducted by Dove Associates Inc. for Electronic Payment Services Inc.'s Smart Card Enterprise, concluded that companies looking to position themselves as players in the smart card market in the United States have cause to be optimistic.

"I believe the most significant finding of this research is the degree to which merchant receptivity to a prepaid cash substitute on a card is more than 10 or 15 times more favorable than research conducted on debit cards at the same period in their rollout," said Steve White, a payment systems consultant in the Atlanta office of Dove Associates.

Mr. White warns, however, that merchant-acquiring banks will have to educate retailers about the benefits of accepting smart cards.

Banks "have a significant barrier to cross" in convincing merchants that smart cards will produce tangible results, agreed Ken Forster, the Dove Associates research associate who conducted the survey.

The results are based on 50 on-premises interviews with merchants in Boston and 50 in San Francisco, plus an additional 75 national merchants who participated through a computer-based "conjoint" survey.

The point of the research, according to the Dove consultants, was not to perform a definitive quantitative study of the issue, but to undertake a more qualitative approach than other merchant studies. That decision, they said, explains the conjoint survey methodology.

In a conjoint survey, respondents are given at least two choices for each scenario and are asked to select the one they prefer.

Nine categories of merchants were surveyed: convenience stores, pharmacies, gas stations, telephones, vending machines, parking lots, fast food outlets, supermarkets, and coin laundries.

For survey purposes, a smart card was defined as a card with an embedded computer chip capable of storing value. Merchants were mostly asked about the use of the card as a cash substitute, basically for purchases under $20.

The survey was conducted in last November and December.

Interviews with merchants at the local level indicated that a smart card with stored value is viewed as primarily providing value to the consumer, according to the Dove study.

Merchants attributed the product's attractiveness to its ability to reduce the length of lines at the checkout counter, a clear benefit to both consumers and store owners.

When asked what smart card feature would best provide value to their store operations, merchants regularly said a low per-purchase transaction fee was most important.

Speed of transactions was also found to be a critical factor in smart card acceptance, said Mr. Forster.

Merchants "don't like to turn around, punch numbers, get authorization codes," he said. "It's not worth it for them. "But with a smart card with prepaid functionality, well, merchants immediately see the benefits."

In addition to the pricing and the transaction speed, owners of stores near colleges and in lower-income areas were highly attracted to a product that could reduce the volume of checks returned for insufficient funds without time-consuming on-line check authorization.

Many respondents, however, were concerned about the potential for overwhelming choices in the payments area, entering into what one store owner called "payment overkill".

Merchants in the study conveyed frustration over the proliferation of new payment systems that offer no interoperability with current payment options yet demand capital outlays for terminals and connections.

The entire U.S. merchant-terminal base is estimated at two million, with only about 5,000 currently capable of reading smart cards.

What's more, many smart card proponents say the real market for the cards will be for $20-and-under transactions, bringing into the equation an entirely new category of merchants, many of whom do not yet have any terminal at all.

The smart card debate has closely resembled the paradox about the chicken and the egg.

"Which comes first: the terminal or the card?" asks Mr. White.

"Every expert says the terminal must come first," he answers. "That is why receptivity of merchants is so important. We do not want to have to overcome battles to terminalize the world."

Mr. White points out that smart card pilot tests planned for the United States - including Visa International's Atlanta-based Olympic pilot and EPS' Delaware test - are taking place in areas where just a few banks control a lot of market share.

"In the market where EPS is going to pilot, four banks control 80% of the market," he said. "Also, there are a few big multiple-location merchants there. These major players will create the infrastructure, which will then trickle down to smaller merchants, who will then feel they can leverage the technology without taking on a lot of risk."

The survey concluded that a wide-scale rollout of smart cards is unlikely to occur unless a major financial or retail institution goes through a highly publicized pilot program.

The two major card associations - Visa and MasterCard International - are good bets to get such a program off the ground, said the Dove researchers.

Merchants participating in the survey said they would sooner join a successful program than expose themselves to the risks of pioneering.

"Banks really have to start thinking about taking a leadership role," said Mr. White. "A lot of nonbanks are just waiting to fill the void as banks abandon the payment systems in this country."

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