Not so long ago, smart card advocates in the United States seemed a little like Galileo, who was called a heretic for espousing the view that the Earth revolved around the Sun.
Today, after years of pooh-poohing by mainstream U.S. bankers, the smart card set say their world view is gradually being embraced. Executives who gathered in Miami last week at the 10th annual CardTech/SecurTech conference said they see evidence that the card world will soon revolve around chip cards.
Gail A. Francolini, vice president in charge of global chip technology at MasterCard International, was adamant that smart cards can change the economics of the U.S. card industry.
"We view smart cards as the future," Ms. Francolini said. "The next market-share wars will be fought on the battlefield of chips and e-commerce."
Smart cards can solve such credit industry problems as fraud and low retention rates, she said.
"There is a major challenge to keep customers after the teaser rate expires," Ms. Francolini said. "With smart cards, card features can easily be updated without reissuing the plastic," giving consumers "less motivation to shop around."
MasterCard and rival Visa International both worked the CardTech/SecurTech conference like a giant science fair. Both associations were lobbying banks to start issuing chip cards, and each was seemingly hoping to take first prize.
After the bold words from Ms. Francolini of MasterCard came news that Visa had cut deals with vendors to give steep discounts to U.S. banks that agree to convert their mag-stripe card portfolios to chip.
The biggest proof the executives cited that smart cards are on their way is American Express Co.'s commitment to its chip-based Blue card, introduced in the United States in August. And card issuers in many other countries have already gotten the message; MasterCard said last week that all of its magnetic stripe cards in Brazil would migrate to chip in the next two years, and Visa has reported similar progress.
While the U.S. market has been the last to declare chip cards anything but heresy, it is also the place where true believers see the biggest future.
One reason is that chip-based credit cards can help consumers do many, many things that they cannot do today. Smart cards can give people immediate rewards for buying goods at various merchants. The cards can manage multiple loyalty and rewards programs. And for people skittish about the Internet, smart cards can assure privacy, security, and authentication.
"Loyalty applications have tremendous implications for smart cards," said Jerome Svigals, a smart card consultant in Redwood City, Calif.
The extra value that smart cards offer may also help issuers stem the loss of customers who switch for low introductory rates. In the first quarter 13% of consumers canceled a credit card account, Ms. Francolini said.
Banks can also make extra revenue from smart cards by licensing space on the chip to merchants or using the space for other fee-based services, Ms. Francolini said.
The best business case for chip technology is to reduce credit risk and fraud, she said. In 1998 the industry had $21 billion in credit card chargeoffs, she said. With smart cards, issuers can increase or reduce credit limits, restrict card use to specific categories, and set criteria for online purchases for each customer.
Jim McCarthy, senior vice president of member and merchant sales at e-Visa, Visa's Internet division, told a large group of payment and chip executives that the term "smart card" was becoming a misnomer.
"It's not just about smart cards anymore," Mr. McCarthy said. "It's much bigger than that." With mobile commerce becoming what many in the industry are now calling the "killer app" that will make the chip ubiquitous, Mr. McCarthy said chip technology may end up taking on a different form.
Visa is working with wireless companies in Europe to test ways to insert a chip directly into the wireless handset, thus eliminating the need for an actual card. Microsoft Corp., which last year was trumpeting the secure log-on access that comes with its Windows 2000 software as the impetus to smart card adoption in the United States, has come out with a Windows tool kit that enables developers to create their own GSM and SIM card applications, extending Microsoft applications to mobile phones. (SIM stands for subscriber identity module, and GSM refers to Global Systems for Mobile communications standard.)
Mr. McCarthy said electronic commerce and mobile commerce would drive chip adoption in the United States. "We view the world in terms of access devices to a payment network," he said.
Gemplus SA, the No. 1 chip manufacturer, and Elcotel Inc., an electronic terminal developer, announced an agreement to deploy smart-card-enabled pay phones that can recharge debit cards, retrieve e-mail from remote locations and deliver advertising messages.
During the next 12 to 16 months the two companies plan to replace 1.5 million Elcotel terminals in the United States.
While much of the buzz at CardTech centered on mobile commerce, some chip technology executives insist that transit and secure access applications will drive smart cards.
"The two major early adopters are transit and secure access," both "physical and online," said Mario Di Prizio, director of engineering and product development at Motorola's smart cards division.
Mr. Di Prizio said that within three to four years most major U.S. cities will have chip-based transit systems. San Francisco's 26-agency chip-based transit program, the first of its scale, will be up and running next year.
In San Francisco, 600 merchants have signed on to sell the transit passes in their stores. "We hope once they see the increased traffic from people buying passes," Mr. Di Prizio said, they will see the value of purchasing smart card readers and adding loyalty applications to the cards.
"Our strategy is to get the transit authority systems installed, then for a marginal cost, add other applications to the cards," he said.
