Some people think the U.S. future for smart cards reads like "Waiting for Godot," but chances are that it will read more like O'Neill's "The Iceman Cometh"; when it arrives, it won't be nearly as great as expected.

This doesn't mean smart cards are a bad idea (most sources agree that merely loading a stored value application onto a card isn't enough to make a business case for the cards) or that they can't succeed in the United States.

By the end of 1997, more than 100 million smart cards will be in use worldwide-95 percent of which will be in Europe-so it's apparent that they can enjoy a strong following under the right conditions.

And in the long run, those who advocate the use of smart cards contend, substantial advantages like cheaper administration, better fraud protection, support of multiple financial services through the electronic channel, better prospects of data mining and, in their stored-value incarnation, what is effectively an interest-free loan to the bank from the cardholder are reason enough for issuers to adopt smart cards.

uphill battle

Proponents of smart cards say that it's just a matter of time before embedded chips replace magnetic stripes on the nation's credit cards. The question for the future of smart cards in this country-especially put to bankers-is how to overcome various structural problems to make multi- application smart cards, with all of their advantages, commonplace.

But U.S.banks face different market challenges than their European counterparts. Smart cards have been highly successful in Europe, an arguably oligarchical market where cards are backed by powerful consortia of financial institutions and government bodies. But how soon they'll have similar success in the free-for-all American market-if at all-is another matter. Octavio Marenzi, a principal of the newly formed Needham, MA-based Meridien Research, thinks it will take five to seven years for them to be widely adopted in the states.

This is likely to be true, he says, because many of the structural issues that made France's Cartes Bancaires and Belgium's Proton systems successful, and are likely to favor Germany's Geldkarte as it's rolled out this year, don't exist in the States. "In Europe, there's nothing else left-only smart cards," he says. "That's happened because you have very strong central card-issuing consortia that were set up by all the banks, essentially, so you have only one decision point to make it happen, whereas in the States you have an economic landscape that is much more competitive and fragmented."

Europe's political and financial structure descends from monarchies that owned everything and gave what they wanted to whomever they chose. The modern result has been highly centralized nations-at least compared with the United States-dominated by very large institutions that can adopt new programs easily by foreclosing consumer choices. This has made it relatively easy to form large consortia of banks, merchants, telecommunications companies and governments to launch smart card programs.

speed bumps ahead

The United States, on the other hand, was built on Adam Smith's laissez-faire principles, and filled with smallholders raised to think and act in their own interests, even if it offends large groups that might be using the same perspective. The result on the macro side includes fragmented banking, merchandising and telecommunications systems, not to mention competing credit card programs.

Since smart card programs have been most successfully introduced through the consortia made possible by Europe's history, say experts, this alone poses a major speed bump for the American smart card rollout. "It's going to happen here in a much more haphazard way," says Marenzi. "That sort of consortium could never happen in the United States. You couldn't even imagine a situation where the top ten banks could get together and agree on what kind of product they're going to deliver to the market."

Marenzi and other industry observers also point out that Americans like to think they control their own checking accounts and are used to paying their bills as they see fit; Europeans, on the other hand, are used to having their utility bills, for instance, paid directly out of their accounts to the billing authority. Since many smart card programs work as debit cards, it may take some selling to convince Americans smart cards are a smart move for them.

banks gain float

Another problem facing a nationwide smart card rollout in the United States, at least in the stored value version, goes right back to the awkward American tendency to use common sense, and act in what they think are their own interests. Loading $100 onto a smart card means making an interest-free loan to the bank from the cardholder until it's spent down. Since they're unlikely to remember the reverse occasion, consumer acceptance of the so-called "electronic purse" functions of smart cards is likely to be tepid at best. "If you ask the average person, 'Do you want to make your bank an interest-free loan, or would you rather borrow the bank's money,' the answer becomes pretty predictable," says Meridien's Marenzi.

Consider that if the U.S. eventually fielded 50 million smart cards with an average stored value balance of $100, the outstanding daily credit balance for issuers from consumers would be $5 billion.

Another wrench in the smart card works is the common-held belief in this country that cash works fine and doesn't cost anything to spend, thus- checking account fees aside-the idea of paying to use their own money isn't an attractive proposition to many people.

Case in point is the European experience: France's Cartes Bancaires 26 million cardmember system includes no "electronic purse" features; only Germany's Geldkarte system does at present.

The best way to appeal to the American mind, say experts, is to appeal to our common-sense self-interest, and stress smart cards' strong fraud protections. Since preventing fraud is in everyone's interests, offering it should prove a strong selling proposition.

"The key driver for banks is going to be the fraud issue," says Gareth Herschel, a research analyst with Stamford, CT-based Gartner Group. "It's very easy to quantify; this is our current level of fraud-it's unacceptable. This is the sort of reduction of fraud we can expect from smart cards, therefore it's very easy to justify it on costs."

In France, the Cartes Bancaires program reduced credit card fraud from about .27 percent when it was introduced in 1987, to nearly zero in 1996, according to a recent study by The Tower Group, a bank consultancy and research firm based in Newton, MA.


Another way to help open the U.S. market would be to make smart cards the common medium of exchange on the Internet, perhaps by selling keyboards with smart card readers on them, says Lawrence Walker, CEO of Certco.

Certco has developed a micropayments system it hopes to market widely, based on software authentication rather than the hardware sort offered by smart cards. "You need some magic, perhaps smart card readers in corporations, that get the proliferation of readers out there," he says. "It's a sort of chicken-and-egg thing, but it would create the critical mass (of payers and payees) you'd need to get things going," he says.

The recently debuted WebTV, which received much attention this past Christmas season, includes a smart card reader in its hardware. WebTV is an Internet service provider that aims to capture a large part of what its management hopes will be the mass market future of the Internet, including bank-originated electronic commerce.

The other important element in a successful rollout? Real cooperation in the American "consortia." Competition may be what made America great, but unless U.S. smart cards become more than fancy credit cards, overcoming the structural and cultural hurdles smart cards raise with a united push by enough parties to dominate the market, smart card initiatives won't create much more than a nasty meeting of the executive committee.


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