Visa International will begin offering financial incentives this year to issuers and acquirers whose point of sale terminals accept smart cards, a move that analysts said could prove the elusive first step to widespread acceptance of chip technology in U.S. markets.

The interchange incentives, starting in October, will be offered only for interregional transactions, which Visa says account for about 6% of its $1.4 trillion annual volume worldwide. International hubs in the United States such as New York and San Francisco and merchants in the tourism industry will be the first wave of companies targeted for the incentive plan.

The marketing effort, part of the Smart Path initiative that Visa launched last June, combines a number of measures to help banks migrate to chip technology. It is reminiscent of incentive programs that card associations have used in the past to encourage banks and merchants to invest in new point of sale terminal technology.

"They're lowering the barrier for the adoption of chip technology in the U.S.," said Frank Pierce, vice president of marketing and business development at Hypercom Corp. in Phoenix. "When they lower the cost or make it more attractive financially for someone to adopt chip, people will adopt it - and the applications will follow."

Although Visa declined to offer details on the program, it did confirm some pricing incentives linked to the effort.

Under the plan, acquirers would be offered a discounted interchange rate of 1.0% if they install point of sale terminals that accept chip card transactions. The standard Visa interchange rate is 1.1% for electronic POS terminals. The San Francisco-based association will also offer an incentive to issuing banks: If a card carries a chip-based Visa payment application, the interchange rate received by the issuer goes up to 1.2%.

MasterCard International said it is not offering similar incentives at this time. However, MasterCard's European affiliate, Europay International, will offer new interchange rates on cross-border transactions starting in June.

Waterloo, Belgium-based Europay will reduce acquirer-paid interchange by about 5 basis points if the merchant upgrades to chip, according to Cardfax, a newsletter published by Faulkner & Gray Inc., which like American Banker is owned by Thomson Financial Media.

Industry analysts called Visa's new interchange rates a good "first step," but said interregional transactions were not a big enough chunk of overall transactions to make smart cards ubiquitous.

"It's one driving force and it is initially for a small percentage of the transactions, but if it leads to broader base incentives, then it will be a very major factor," said Dan A. Cunningham, president and chief executive officer of Potomac System and Technologies in Potomac, Md.

Duncan Brown, director of North American research at Ovum Inc. in Wakefield, Mass., said Visa may have targeted interregional transactions to test whether the new chip acceptance point of sale terminals really work, before attempting this on a larger scale.

"This must be a short-term thing," Mr. Brown said. "They really need to address the issue of merchant acceptance in domestic markets" where most smart cards are being used.

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