Banking on the microchip 

By Anne D'Innocenzio Associated Press Business Writer
Posted on January 08, 2001 
Imagine a single card that
lets you purchase and
download an airline ticket
using your PC. That same
piece of plastic could also
pay for a restaurant lunch,
open secure doors at the
office, check out books at
the library. It could even
become your car keys.

Sound like a script from the
Jetsons? Not really.

Such is the promise of smart cards, wallet-sized plastic cards with embedded
microchips that major U.S. credit card issuers are rolling out in a big way in the
next few months.

Smart cards, albeit with limited uses, have been popular for years in Europe and
parts of Asia and Latin America. The industry says it has shipped more than a
billion a year since 1998.

Despite pilot projects, smart cards have never been a commercial hit in the United
States, however. For U.S. card issuers, there's been inadequate financial incentive
while retailers have shown little interest in acquiring new card readers to replacing
the magnetic-only variety.

Some financial powerhouses are betting they can change that now. They're
banking as first adopters on the estimated 35 million online shoppers - almost
double that of last year - who are looking for secure ways to shop and add value
with exclusive discounts and other promotions.

In September, Visa U.S.A. teamed up with three of its top ten credit card issuers
- First USA, Providian Financial Corp. and Fleet Boston Financial Corp. - to offer
a suite of services led by secure online purchasing. To entice consumers, they are
throwing in free PC card readers and touting introductory rates as low as 0
percent with no annual fee.

Meanwhile, MasterCard, for whom big markets include Brazil and Japan, plans to
introduce its own smart card in the United States beginning this month - offering
secure identification as well as credit and debit functions to begin with.

Microsoft, predictably, is also in the game. Software for smart card readers is
included in its Windows 2000 operating systems.

The incentives for the credit card industry are great.

First, chipcard use could considerably reduce the $1.09 billion that credit card
companies lose annually to fraud, according to the Nilson Report, an industry
newsletter. And with the per-unit cost now down to $3, compared to $12 a year
ago, the cards are now much more economical to deploy widely.

Thanks to the improving power and versatility of microprocessors embedded in
the cards, consumers will be able to better protect themselves against online fraud
as they bank or trade stocks. They will also be able to store digital cash, personal
information, Web site passwords and addresses, and such things as loyalty
coupons from merchants or frequent flyer points.

As circuits on the cards are upgraded to hold more memory and functionality,
cardholders may eventually be able to store everything from driver's license
information to medical insurance data and monthly rail or bus commutation tickets
- all on a single card.

The Visa move comes on the heels of the September 1999 launch of American
Express's Blue, a chip-embedded card that allows consumers to transfer credit
card information securely online with the help of a card reader. 

"We're seeing some enormous steps forward," said Donna Farmer, president and
chief executive officer of the Smart Card Forum, a not-for-profit association.

Worldwide sales of smart cards are expected to skyrocket to $8.1 billion by 2004,
from $2.4 billion this year, with about 40 to 50 percent of that growth from the
United States, according to Dataquest, the research arm of Gartner Group.

Why the big push now? After all, just two years ago Master Card International,
Visa USA, Citibank and Chase Manhattan Bank shelved a smart card trial on
Manhattan's upper west side after just one year in operation.

Smart card executives say that project bombed because customers were confined
to just one part of the city.

Promoters say smart card use by retailers was hurt in Europe by high
telecommunications costs incurred as merchants attempted to authenticate
transactions - a situation that has now changed with plummeting tariffs.

That's not a problem in the United States, says David Robertson, president of
Nilson Report.

And the security enhancements are a big plus:

When shopping online, customers stick the card in the reader, and punch in their
personal identification number. At a restaurant, the user needs to have the pin
number to unlock the card.

If the card is stolen, the account is deactivated and customers receive a new card
with key account information restored on the chip.

While smart cards are appealing to consumers by offering another level of
security for online shopping, their prime attractiveness to card issuers is their role
as relationship-builders with merchants, said Charles Walton, senior vice president
of TKI, a security consulting firm in Mountainview, Calif.

Issuers face considerable challenges, however.

On top of the lifestyle changes involved - and twisting the arms of technophobes -
merchants will need convincing because it is they who must upgrade magnetic
strip readers.

At the same time, computer manufacturers will need to incorporate card readers
into their PCs and laptop computers as standard equipment.

To date, smart cards have been successful in confined U.S. rollouts, from college
campuses, where students use them to pay for books and meals, to military
compounds in Bosnia.

The Washington D.C. metro commuter rail has also embraced the smart card. To
date, 110,000 commuters have signed up for the system's SmartTrips stored value
cards, which can hold up to $200. That represents half the system's peak hour
riders.