Smart Cards: U.K. Adoption Of Chip Cards May Affect U.S.

The United Kingdom's card industry is going smart.

The Association for Payment Clearing Services, the nationwide payment systems policy body, made a long-anticipated decision last week to put computer chips on all newly issued plastic cards, beginning early next year.

It is a significant endorsement of the advanced card technology, potentially with global implications. It could reverberate in the United States, where bankers openly question the economics of smart cards and where chips are almost nonexistent in the mainstream credit and debit market.

Unlike France, which made its pioneering chip-card move in the early 1990s mostly on debit cards, the United Kingdom is more akin to the United States in terms of credit card popularity. U.S. bankers thus may find it easier to relate to the British experience.

MBNA Corp.'s recently announced test of Visa smart cards at its headquarters in Wilmington, Del., may provide an early example of cross- pollination. MBNA's U.K. subsidiary is a member of the Association for Payment Clearing Services' card payments group.

It will be a "mammoth task" to replace 104 million cards and upgrade 530,000 terminals in retail locations, the U.K. association, known as APACS, said in the July 8 announcement that followed a vote by its governing council, which consists of senior executives from top financial institutions.

But a persistent fraud problem, particularly counterfeiting, moved APACS members "to make the strategic decision now" to rely more on the chip and less on the obsolescent magnetic stripe. The stripe, however, will continue to coexist on the credit and debit cards to make them compatible with other systems around the world.

The U.K. banking community expects to benefit like its French counterpart, which virtually obliterated domestic fraud by relying on chips to authenticate customers at points of sale.

In each case, chips were-or are to be-introduced on an existing, mass- market foundation of bank cards. Cardholders do not have to be convinced to use a new product like electronic cash, though such experiments are under way concurrently.

Whereas the French used chips to institute a personal identification number system on 30 million bank-issued cards, the British will continue to rely on signatures at the point of sale and PINs at automated teller machines-much like the United States.

France's early embrace of the technology, which was invented there, put its banks in a position to explore additional uses for the upgraded infrastructure, such as transit-fare payments and Internet commerce.

The U.K. institutions share that motivation. By starting later, they become the first to base a nationwide system on EMV, a technical standard developed by the Europay, MasterCard, and Visa associations.

"This decision is a milestone in the history of the card payments industry and demonstrates the commitment of the APACS members to the introduction of this new technology," said Chris Pearson, the association's chief executive officer.

"Chip cards will enhance the security and, over time, the range of services available to cardholders," Mr. Pearson said.

The APACS decision marked the culmination of a three-and-a-half-year study project that included a trial run since last October of 117,000 cards of many brands-including MasterCard, Visa, American Express, and the Switch debit card-in the cities of Northampton and Dunfermline.

With all that time invested, the participation in the test of 13 financial institutions, and the cards' successful acceptance in more than 200,000 point of sale terminals and cash machines, expectations ran high that APACS approval of a national rollout would be just a formality.

In its announcement, the association pointed out that its market research indicated cardholders regarded chip cards as superior to others. APACS also conceded there were "some technical issues which need to be resolved," but they did not stand in the way of the decision.

"From a technical standpoint, the pilot was a clear success," Steve Collins, director in Barclays Bank's emerging markets group in Northampton, said a few days before the APACS council vote. "The commercial and operational issues are what cause some challenges."

Credit card fraud grew into a national political issue and a plank in Conservative Party policy around 1992, Mr. Collins recalled. That spurred a unified response by the banks, assisted by international MasterCard and Visa initiatives like on-line authorizations and the magnetic-stripe security techniques known as CVC and CVV.

As they plugged the fraud holes, counterfeiting continued to increase, giving rise to the chip-based response known as CAM, or Card Authentication Mechanism. It includes a sophisticated data encryption system for certifying cards and transactions, while making the cards less susceptible to duplication.

APACS said U.K. card counterfeit losses rose 53% last year, to the equivalent of $32.5 million. They are associated with crimes costing several times that amount, said Home Office Minister Alan Michael.

"These new cards provide much better security and send a very clear message to anyone tempted to commit plastic card fraud that they are not likely to get away with it," the minister said in a statement disseminated by APACS.

"The members wanted us to work together, and there was no petty bickering" among Visa, MasterCard, and the latter's Europay allies, said Jon Prideaux, senior vice president of Visa International in London. He said the divergences of opinion over stored value and electronic purse strategies and standards do not carry over to debit and credit security.

Mr. Prideaux said there was a high degree of cooperation not just among the multinational card associations but also American Express Europe, Citicorp Diners Club, and Switch Card Services.

They agreed on a technical standard called UKICCS-United Kingdom Integrated Circuit Card Specification-derived from a Visa version of software that adhered to the EMV rules.

"The U.K. banks have devised a commercial framework" to ease the expense of deploying or upgrading terminals to read smart cards," Mr. Prideaux added. With the APACS approval, "this commercial framework will take effect. It could be a model for other implementations. This is a tremendous accomplishment for the U.K. banks."

"This was a classic case of technology cooperation in the area of fraud," said Mr. Collins of Barclays. "Competition will come in later because it builds an infrastructure that other services can be developed on."

In a presentation to the Cardtech/Securtech conference on Orlando in May 1997, five months before the Northampton and Dunfermline pilot, Mr. Collins and Barclays emerging markets group managing director Roger Alexander said British bankers shared Americans' concern about the business case of chips on cards.

Mr. Alexander said the "industry problem" of fraud justified a collective response. He also cited the hazard that banks could be disintermediated if they did not grab hold of the new technology ahead of nonbanks, and warned that the credibility and integrity of ATM networks could be seriously harmed if a major fraud were perpetrated.

APACS said conversions of 23,200 ATMs will begin this year. NCR Corp., which supplied 80% of the machines, said its contract for software and card-reading upgrades is worth $22.4 million.

In the run-up to the test, the Barclays officials stressed that the migration to chip cards-particularly to a globally standard and interoperable infrastructure-could take 20 to 30 years and therefore required a sustained commitment that should begin gradually with card authentication.

All cards would have chips within 10 years, Mr. Collins predicted at Cardtech/Securtech, but "this is a journey that will take a long time. We start by creating an infrastructure."

"We are not doing it for technology's sake," Mr. Alexander added. "We think smart cards are a solution to the threat of counterfeit and fraud in the U.K. We are willing to spend tens of millions of pounds on the infrastructure and intend to build other applications on it that will be cost-justified."

"APACS' decision heralds much more than just the opportunity to streamline our wallets and reduce fraud," Per-Olof Loof, senior vice president of NCR's financial solutions group, said last week. "It allows banks to deliver innovative new products and consumers to exercise greater control over their personal finances."

He said NCR research showed three-fourths of U.K. consumers want to use value-added services on cards, such as loyalty points and electronic cash.

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EAST KILBRIDE, Scotland-Motorola Inc. said it offers a powerful new chip that allows multiple products and related information to be consolidated on a single smart card.

Thanks to advanced manufacturing and engineering techniques, the chips would have up to 32,000 bytes of EEPROM-electronically erasable, programmable read-only memory. Most current chip cards have one-tenth that capacity, but 16K and 32K cards are on order.

Motorola offers MSC1014 and MSC1114 chips, with cryptography engines, for payment applications. MSC1010 and MSC1110, without that capability, are for telecommunications.

"Interest in these chips has been huge," said Daniel Hoste, general manager of Motorola's smart information transfer division. They make "multiple applications a reality today rather than a forecast for tomorrow."

Fabien Thiriet, marketing manager for Schlumberger, said the chips are ideal for Java-based programs. With additional read-only memory, "the EEPROM can be dedicated to user-memory features," such as phone numbers in wireless telephone cards.

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