Prepaid cards, viewed by many bankers as a new and uncertain frontier, are gaining consumer acceptance even before they hit the market.

A remarkably consistent string of independent surveys show that sizable numbers of consumers are at least open to trying the cards that carry a dollar value and substitute for cash. Typical uses are for mass transit fares, vending machine products, and other small purchases.

The findings are also consistent from country to country, suggesting that prepaid cards can become a global phenomenon. Indeed, U.S. bankers and their potential partners in prepaid programs are beginning to believe that this is one card-technology advance that will not stay confined to Europe or Asia.

The straws have been in the wind for a couple of years. But now speculation is turning to action, spurred by an increasing number of national and international conferences like this month's Cardtech/Securtech in suburban Washington, standards efforts like the Smart Card Forum and Visa International's "electronic purse" project, and the marketing of actual products.

Making the Case

Among the evidence:

* Synergistics Research Corp. of Atlanta, in a nationwide poll in July 1992, found that three out of 10 people expressed interest when they were described a prepaid card that could be debited at gas stations, fast-food outlets, post offices, and other cash-oriented businesses. Three-fourths of the interested respondents were willing to pay small transaction fees, perhaps 10 cents each.

* Payment Systems Inc. of Tampa, Fla., concluded in 1993 that the glass was at least half-full. With 52% of its consumer sample rejecting the notion of prepaid cards, 48% were interested or undecided. The interested group, at 21%, was 50% bigger than the number interested in point of sale debit card services in 1984.

* Smart Card Enterprise, a unit of the automated teller network operator Electronic Payment Services Inc., did a survey of 1,000 supermarket shoppers in its home state of Delaware last year and found that 88% would use a plastic card with stored value. At least three out of four said they would use it in each of four places: grocery stores, service stations, convenience stores, and pay telephones.

* The Metropolitan Transportation Authority of New York, while developing its prepaid card for subway and bus fares, uncovered such a high level of consumer acceptance that it is considering creation of an "open system," with cards usable at any number of participating merchants.

A survey showed almost half of city residents immediately favorable toward the prepaid concept, even one carrying the brand name of the much-maligned New York subway agency. Consumers were even more interested when they were told of the open-system alternative.

The MTA findings were especially striking to bankers and other observers, because they suggest that even hard-bitten New Yorkers can be won over.

Little Brand Name Effect

"Maybe it shows how strong this concept really is, regardless of who is the actual issuer," said Susan Baumann of Bank of America, who attended recent Cardtech/Securtech and Smart Card Forum meetings.

"I think our research is extremely interesting and important," said Peter Quadagno, vice president of operations for the Metropolitan Transportation Authority Card Co., who presented the findings at Cardtech/Securtech and has been rolling out the subway-card system this year.

Upending one of his own hypotheses, the research showed that a card's brand name had little effect on the consumer response. Among people who were asked about an unbranded or generic approach, "the MTA was most frequently cited as the group that should sponsor the card," Mr. Quadagno said.

Mr. Quadagno, who worked previously for Manufacturers Hanover Corp. and NCR Corp., said MTA also was concerned that it would be difficult to evolve from a transit-only card to a more open system. But the research did not bear that out.

'Evolutionary' Change

The MTA has begun discussing with outside companies, including transaction processing firms, ways to expand the card's acceptance.

The transit agency may evolve from its current, bendable plastic card toward the more durable magnetic-stripe bank card standard, and over the long run will consider the integrated circuit, or smart card, technology that has gained acceptance in France and could spread as a result of the Visa electronic purse discussions.

Mr. Quadagno stressed that such changes, if they occur at all, will be "evolutionary, not revolutionary," and must be "transparent" to customers.

Anything the MTA or any other organization does will require additional market and feasibility studies. One will be sponsored by the Smart Card Forum, the international, interindustry consortium that seeks to promote the "interoperability" standards to facilitate transaction interchange.

'Exciting' Results

Catherine Allen, chairman of the forum and a vice president in Citicorp's technology office, said the forum plans to commission a cross-industry, or multiapplication, study, gauging consumers' interest in open systems in general, and in various combinations, such as a telephone-transit or a payment-travel card.

"Citibank did some proprietary research in several markets, and [the results were] as exciting as others we've been hearing about," Ms. Allen said.

Following are some of the high points from what is in the public domain.

SMART CARD ENTERPRISE

Electronic Payment Services Inc., which owns the MAC automated teller machine network and is believed to be interested in playing a role in the New York MTA's system, is the U.S. organization farthest along toward an open, prepaid card program. Its head start explains its conspicuous absence from the Smart Card Forum, with which it does not want to share too much of what it knows.

The business case of EPS' Smart Card Enterprise is based on research on the cash payment system by Linda K.S. Moore, a Washington-based consultant: Of 360 billion payments made annually in the U.S., 300 billion are in cash, and 270 billion are for $2 or less.

EPS is developing and testing a chip-enhanced smart card to replace cash in transactions of less than $20. According to Bernard David, speaking for the Smart Card Enterprise at the Cardtech/Securtech conference, the company sees continued growth and acceptance of debit card transactions, and expects 30% to 50% of plastic cards will be smart cards by 2000.

When a group of Delaware shoppers -- probably not representative of the national population -- were asked where they would use a stored-value card, 94% said supermarkets, 85% gas stations, 78% convenience stores, 75% public phones, 74% for stamps, 68% for parking, 65% for fast food, and 54% in vending machines.

Asked where they would like to load value onto their cards, 42% said at home, 34% at ATMs, 27% at merchant locations, and 13% at work.

PAYMENT SYSTEMS INC.

"Most estimates say 70% of the developed world's transactions are for less than $2," PSI senior vice president Martha Rea, acting executive director of the Smart Card Forum, told a forum meeting last fall. "A smart card application would be replacing something that is universal."

Ms. Rea said "the only real consumer demand" for a prepaid card was from universities, several of which had built systems for student meals, books, and other transactions on or near campuses. But the potential, broader market receptivity is clear.

One-fifth of households in 1993 were solidly interested in prepaid cards. They had an average age of 41, $44,650 of average household income, and 73% of them worked full-time. By contrast, those not interested had an average age of 41, income of $43,320, and 56% of them worked full-time.

PSI also concluded that a business case can be made for merchant acceptance -- most readily in such areas as mass transit, vending machines, and government services -- if "multiapplication issues" like security, equipment standards, and settlement procedures were addressed, Ms. Rea said.

"There is a great deal of consumer receptivity to prepaid cards," PSI president Allen DeCotiis said last week.

He said bankers were taken by surprise because prepaid products do not fit into traditional debit or credit categories, some bankers fear a drain of deposits into prepaid cards, and bankers are "not used to an entire business case being based on float" -- the unspent portion of value in the card.

INTERNATIONAL

The biggest news in prepaid cards outside the United States is coming from National Westminister Bank in London. Hoping to move quickly beyond the single-application telephone or vending cards that have become prevalent in several countries, Natwest has begun marketing Mondex, which it calls "a new international payment system ... designed to compete with and partially replace cash."

Although Mondex won't have its first live market test until next year in Swindon, England, in partnership with Midland Bank and several technology vendors, Natwest is touting it as a major breakthrough. The Mondex "purse" will have "pockets" for up to five currencies, will not be limited to small-ticket transactions, and will permit payments between one purseholder and another, analogous to anonymous cash exchanges between individuals.

At the U.S. Smart Card Forum meeting this month, Natwest consultant James Riddell said Mondex has been supported by "intensive market research" in France, Germany, Japan, the United Kingdom, and the United States.

In the U.K., 75% of adults 18 to 65 said they would probably use the card -- evenly divided between those "quite likely" and "very likely." They said they would want to carry "a high level of value" in their cards, and would be willing to pay more than typical credit card fees.

"I know it sounds strange," Mr. Riddell said about the fees. "But the fee income potential is significant, and if we didn't think so, we wouldn't be here."

Similar indications are coming from elsewhere.

In Denmark, the Danmont open prepaid card system is going national after a local market test that began in late 1992. The banks are expecting a payback on their joint investment after 2000, but were more concerned about the strategic reasons for creating the system, said Jens Lindboe-Larsen, vice president of systems development.

In South Africa, at once a developed and developing economy, bankers in a joint electronic purse program are projecting 15 million smart prepaid cards within five years.

"Our research has shown that one of the aspirations high on the priority list of our customers is the ability to make purchases using a card," said Johan Ras of First National Bank of South Africa. "Very few black people presently qualify for a credit card because of low income. We therefore need other card mechanisms to meet their needs.

"If we can find the right products, maybe we can wean them from cash to cards without going through the check stage."

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