If telephone companies, already expert at basic transaction processing, become more active as providers of payment services, then U S West will likely be seen as having blazed the trail. Colorado-based U S West is the first of the Baby Bell companies, and one of the first U.S. corporations of any kind, to begin issuing smart cards. Building on a test in the Pacific Northwest, U S West expects stored-value cards to be usable at 16,000 pay phones in five states by next August. The initial plan is to accommodate the cards in specially equipped Millennium telephones made by Northern Telecom of Canada. Beyond the initial trial in Seattle, U S West plans to deploy the phones in the Minneapolis, Phoenix, Denver, and Portland, Ore., areas. If the chip cards, called Telecards, prove popular, consumers may later be able to use them as alternatives to cash in routine purchases of anythi ng from postage stamps to theater tickets. U S West is considering the creation of a merchant network to accept the cards for retail purchases. Some industry observers say it is a relatively small step from the prepaid telephone application to direct competition with automated teller machines, credit cards, cash, and checks thanks largely to the power of the computer chip. One banker suggested that financial institutions may end up entering partnerships with telephone companies to keep from losing further control over, or market share within, the payment system. The Smart Card Forum, Tampa, a group of about 200 companies from many industries, including banking and telecommunications, is promoting common specifications, or interoperability, to facilitate the use of such multiple-application chip cards. U S West Telecards will come in preset denominations of $5, $10, or $20. Each time a call is made, the card-reading telephone will automatically deduct the cost. The initial cards will be disposable after their value is used up. U S West has not ruled out but has not developed specific plans to introduce a card that could be replenished with value from an ATM or by telephoning a bank, said Michael Wautier, Telecard product manager in Seattle. The company has not decided how far down the road it wants to go toward a refillable electronic purse card that could be used in many locations. Such a move could bring the telephone company essentially into the banking business. I do think this is an opportunity for the telephone companies to compete with the ATM, said William F. Keenan, who until this year was managing director of card services at U S West. He is now senior vice president and head of marketing and business development at National Westminster Bancorp's credit card subsidiary, Natwest Bank Delaware in Wilmington. The only thing phones can't do is dispense cash, but they can give out a secure paper receipt that could be exchanged for cash at a retail store, or electronic cash that can be recorded on a smart card, said Mr. Keenan, who has been active in the Smart Card Forum. Then the cards would be competitive with ATMs or the writing of checks. If they could be used for small purchases at retail locations, the cards could be an alternative to credit cards, cash, and checks, Mr. Keenan added. Bankers need to understand the role pay telephones can play vis-a-vis ATMs, he said. An ATM is very expensive when you include the cost of actually buying the machine and dealing with the environment where the machine is placed, including security features and advertising, Mr. Keenan said. If you look at the Millennium pay phone, its cost is a fraction of an ATM, and you can get ubiquitous penetration very quickly. One indication of the phone's potential ubiquity is the fact that the seven regional Bell operating companies have deployed about 1.4 million pay telephones a reach into the consumer market far deeper than that of the banking industry. The issue is whether Nynex, U S West, and other phone companies will decide to develop this on their own or partner with the financial services industry, Mr. Keenan said. I think they will seek partners, he said, and it will be a good opportunity for banks to work with these emerging phone networks to achieve a significant presence. If banks don't partner, the risk is that the phone companies will develop into a strong set of competitors. The former U S West executive said telephone companies have plenty of pressing problems competition from cable television providers, the need to upgrade antiquated billing systems, the need to invest in advanced technologies like interactive TV that might make them receptive to cooperating with financial services providers. The telecommunications players just can't fight wars on all fronts, Mr. Keenan said. But if they find that the financial services industry is not responsive or receptive, the phone companies have the capability to compete head-to-head. They got networking capability comparable to any of the financial industry payment systems, and they have resources that are more substantial than those of any financial services company or payment system. Mr. Keenan said that while phone company smart cards might seem a natural extension of today's cobranded phone credit cards most of the Baby Bells market bank-issued MasterCard or Visa cards, not to mention AT&T's huge Universal Card program the strategies and products are distinct. Cobranded credit cards are typically geared toward promoting customer loyalty, combining a calling-card feature with conventional credit services, while smart cards or electronic purses open entirely new avenues. Mr. Keenan pointed out that credit cards and prepaid cards are managed by separate business units in most phone companies. U S West sees the Telecard as a way to reduce its operating expenses it obviates coin retrieval and related maintenance and to regain market share that it lost to competitors who now garner nearly half the pay-phone revenues in U S West's territory. If we want to stay in this highly competitive business, we have to offer a product that consumers will prefer over others, Mr. Wautier said. The Telecard also would appear to offer U S West the same cash management advantage enjoyed by American Express and other travelers check issuers the company has the benefit of the float between the time a card is purchased and when its value is used. And if the European telephone card experience is any guide, collectors will snap up some percentage of cards and never use them. Mr. Wautier said U S West is not counting on Telecard float to be a major thing but that studies would have to be done on how long cardholders take to finish using their cards' value. Liliana Grip, Telecard retail manager in Seattle, said the difference between the Telecard and current products that do not include computer chips is in their cost. Most phone companies charge a premium for calling card services; Telecard users will be charged only the normal cost of their calls. Whether U S West expands into the more general-purpose electronic purse depends in part on whether it, as a regulated utility, would face legal or regulatory restrictions, Mr. Wautier said. Mr. Keenan said, The phone companies are operating in a gray area when it comes to competing with banks. But whatever regulatory hurdles they face are very surmountable. The danger is to the banking industry if it perceives the telephone companies as weak competitors . . . They have a tremendous capability to compete with the financial services industry. Steve Alexander is a writer based in Minneapolis.

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