Smart cards slow to garner widespread use

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Although Microsoft's recent entrance into the smart card market was seen as a boost to the fledgling electronic payment system industry, smart cards have had slow consumer acceptance in tests.

Smart cards are now being used for payment and loyalty programs in Europe, but they have only been tested in the U.S. on a limited basis, with the first major test at the 1996 Summer Olympics in Atlanta.

Smart cards look like credit cards, although they contain a chip that can store data, including pre-set amounts of money and customer information.


Consumers pay up front for the cards in a variety of ways. Some retailers, such as drugstore chain Rite Aid Corp., Camp Hill, Pa., give customers smart cards in exchange for gift certificates purchased. And at one city's transit system, passengers buy $5 reloadable smart cards by cash, credit card or debit card. Smart cards can be used at participating retail stores, and eventually will be used with PCs as manufacturers roll out card scanners as part of the hardware or as attachments.

This month, a consortium of financial institutions, including Chase Manhattan Bank, Citibank, MasterCard International and Visa International, is wrapping up a 13-month test in Manhattan's Upper West Side. So far, results have been disappointing, the companies said.


The test involves 100,000 consumers who use smart cards at retail locations including local delicatessens, drugstores, cleaners and other small businesses.

Chase Manhattan and Citibank issued the cards for free, and terminals were provided to the retailers at no cost. To reload cards with digital money, consumers use participating automatic teller machines. But consumer usage has been lower than expected, the banks said.

A Citibank spokesman said consumer interest in the test was high, with a 30% response rate from direct mail seeking participants; out of 100,000 consumers involved in the test, about 58,000 actually loaded money onto the cards, mostly from ATMs. Some early adopters paid $8.95 for a personal card scanner at home that hooked into their phones to order cash downloads, and these customers were the heaviest users.

As for challenges, Citibank underestimated the amount of training merchants would need and found that in order for cards to be widely accepted, more merchants need to participate, the spokesman said.

One possible reason is the card readers were placed beside checkouts, so processing may have taken longer than an integrated credit card system.


Retailers that use a card system integrated with their point-of-purchase equipment will be more successful, said Dan Cunningham, president-CEO of the Smart Card Industry Association in Lawrenceville, N.J.

Drugstore chain Rite Aid, for example, plans to implement integrated smart card readers at checkouts in all of its 3,900 stores, Mr. Cunningham said. Rite Aid was not part of the New York test.

Another problem in the New York test was the limited number of retail stores accepting the card. For example, if consumers shopped at certain stores near their homes, they were able to use the card, but if they traveled to Manhattan's business district, they could not use the card, since the test involved businesses only on Manhattan's Upper West Side.

In addition, staff education among the small retailers was lacking, according to Nicole Vanderbilt, an analyst with Jupiter Communications. In some cases, cashiers did not know about the smart cards when consumers tried to make purchases.

"Although smaller merchants who never go to the trouble of taking credit cards would accept smart cards, those are also the merchants who don't have time to educate their staff," Ms. Vanderbilt said.


However, some industry players look to Microsoft Corp.'s entrance as a sign that smart cards could be successful in the U.S. Last month, Microsoft said it will introduce a Windows operating system for smart cards called Windows Card. It will compete with Sun Microsystems' Java Card technology.

"For Microsoft to say this is a key technology and to put their considerable resources behind it is a major step forward," said Mr. Cunningham.

In addition, a new card production alliance between Electronic Data Systems' Electronic Business unit and Oberthur Smart Cards USA is expected to boost the smart card market.

Under an agreement announced last month, financial card maker Oberthur and financial systems integrator EDS will combine their smart card marketing efforts, with EDS transferring assets from its card manufacturing facilities in Westlake, Ohio, and La Miranda, Calif., to Oberthur's Los Angeles offices.

"Together, we'll provide stronger services to our existing clients and significantly expand our ability to offer them new card services, including smart card technology," said Paul Rudolph, president of EDS' Electronic Business unit.


Despite the positive spin from the Smart Card Industry Association and others, there are still those who believe that smart cards will never be as successful in the U.S. as they are in other countries.

Consumers are "far too satisfied" with their current payment options, including cash and credit cards, to take on smart cards, said Ms. Vanderbilt from Jupiter. "It's a bit like screen phones--yes, they will perform certain functions, but they will never be mass market," she said.

Copyright December 1998, Crain Communications Inc.

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