Get Smart

In an excellent article with this title in the most recent Specialty Lender, Tom Wanamaker poses the issue: "Financial smart cards could modernize the credit card industry, if anyone would use them." In following his argument it is helpful at the outset to distinguish among the various types of plastic cards. The typical credit card in the U.S. has only a magnetic stripe that supplies the account number to the card reader. A stored-value or memory card stores information that can be modified in appropriate readers. Typical examples would be prepaid telephone cards that can be "refilled" or thrown away when they are "empty." Intelligent or "smart" cards contain a chip—a tiny central processing unit that can store and process data to make decisions. It also provides greater security than the magnetic stripe on the common credit card. Smart cards for small-value transactions are in use in the Netherlands, Singapore, Finland and Portugal. More versatile smart cards have been issued in England by APACS, a payment association, and by financial institutions in Germany and France.

Wanamaker observes that the U.S. has lagged behind other countries in adopting smart cards. American Express led the industry with its Blue Card in September 1999. That card provided security for online shopping and means of applying online to purchase event tickets. Amex also provided free card-readers to Blue cardholders, with additional readers provided for $25. Reportedly, Amex has invested $45 million in its marketing campaign and hopes to have four million cardholders by the end of this year.

Later, chip cards were issued by Providian Financial, Inc., FleetBoston Financial Corp., and the First USA, Inc. division of Bank One Corp. Providian began with an 8k chip that it expects to upgrade to a 32k chip. It anticipates adding a calling-card function and electronic ticket capability function. Fleet's Fusion card has a 32k chip and a digital ID for secure Internet transactions, a unique online payment feature and rewards in the form of event tickets and e-coupons for using the card. The smart card provided by First USA has a 32k chip that permits cardholders to store and manage their personal financial records. In addition, cardholders can select other features and services that would be useful, so that the smart card can be customized for each cardholder.

As a further recognition of the growth of smart cards, Microsoft and Dell are providing card readers and necessary software in their new desktop computers. The situation is analogous to the introduction of ATMs. There was no point in having an ATM unless consumers had cards to access their accounts, but there was no point in having ATM cards unless there were ATMs. With respect to the market for smart cards, one of the experts that Wanamaker interviewed observed, "The smart card is a great solution looking for a great problem." Eventually, as consumers realize the benefits of smart cards and the technology to facilitate their use is provided, smart cards will become common. Also, merchants will realize that an investment in smart-card readers will reduce their fraud losses from traditional credit cards. Right now, the innovators are learning the hard way how to meet the needs of consumers and vendors with the new technology.