Enhanced capabilities and advanced payment technologies spark renewed interest in smart cards
A blizzard of technology choices confronts banks and card issuers as they ponder which retail point-of-sale opportunities to pursue, with whom to partner, how to proceed and when to begin. Online or offline? Magnetic stripe or IC? Contact or contactless? Radio frequency or infrared? Dedicated-purpose cards or multifunction?
For JCB, one of the world's leading card brands, technological innovation in payments provides a potential source of competitive advantage.
"What distinguishes JCB from the other international brands is that we can accomplish increased card usability and convenience by executing a customer-oriented approach to the migration of the IC card," said Isao Nakanishi, president and CEO of JCB Co, Ltd., and chairman of the Japan Credit Card Association.
Chip-based IC cards contain programmable digital real estate that can host several promising applications. "Our approach utilizes the potential for multifunctionality, for example adding payment functions to transportation-related uses," said Nakanishi.
JCB, in the manner of American Express, acts as a card issuer, acquirer and processor of credit card transactions in Japan and throughout the world. But the American Express link doesn't stop at a mere comparison. Indeed, the long-standing JCB-Amex alliance has recently expanded to include agreements to process each others' card transactions in their respective home markets and to encourage merchants to accept both Amex and JCB-branded cards.
At the same time, JCB has certain association-like features, in that it co-issues cards through approximately 70 partner banks and 50 non-bank licensees. Furthermore, JCB has numerous partnerships, license agreements and agent bank relationships throughout the world. Its global processing network includes a central facility in Tokyo and regional nodes in Hong Kong, Singapore, London and New York.
In Japan, JCB plans to introduce a dual-interface IC card containing EMV-compliant payments as well as contactless transit applications. In and around Japan's Kansai region (population: 24 million, largest city: Osaka, population 9 million), the Kansai Thrupass will allow contactless entry and exit from train and bus stations. JCB will also provide transaction processing for the venture. Japan Rail East, which provides intercity rail traffic to and from the Tokyo metropolis, will issue similar dual-function cards in conjunction with both JCB and Visa.
But it doesn't necessarily take the direct involvement of a financial institution to get a transit card program on track. In Hong Kong, a transit company joint venture called Octopus Cards, Ltd. has had success with a stored-value card that accommodates transit, parking, telephone, entertainment and convenience purchases. "The holding company has been able to view itself as more than just a transit processing authority," said Ed Kountz, analyst at TowerGroup, Needham, Mass., and author of a research note about the Octopus system. "A payment nucleus can be extended to other areas."
The Octopus concept extends into other designs and form factors. By incorporating a photograph, the card can function as an identity badge. Nokia mobile phones can also use the contactless functionality, allowing gabbers to walk through the gate and pay without missing a beat.
Except for 16 banks that allow Octopus to debit their customers' accounts, financial institutions have been spectators to the Octopus phenomenon, ceding the revenue from card issuance, float and overdraft to the transit operators. So far, 12 million cards have been issued, each requiring a refundable deposit of HK$50, or approximately $3.84. Cards can store up to HK$1,000 and include a limited overdraft facility of HK$35.
In the U.S., the main question isn't whether transit operators or financial institutions will gain control of the payments infrastructure for a contactless public transit system. Rather, it's whether most Americans would even notice. "The number of transit rides in Hong Kong is not something you're going to see in Oklahoma City," said Kountz.
Even so, some 31.2 million smart cards were shipped in North America in the first half of this year, more than double the number shipped in the same period last year, according to the Smart Card Alliance, a not-for-profit cross-sector association that includes government and private industry users, card issuers, manufacturers and systems providers.
Of this total, microprocessor cards accounted for 24.9 million, up 87 percent from a year earlier. Memory card shipments jumped to 6.2 million from 1.5 million in the same period last year, more than a threefold increase.
"The growth in smart card shipments is accelerating, bringing total shipments to the U.S. and Canada to over 122 million smart cards since 1999," said Randy Vanderhoof, president and CEO of the Smart Card Alliance. "The change we are seeing is that the volume is more evenly spread across several sectors including financial, retail, pay TV and government. This is very positive because it makes the industry less dependent on telecom, although that sector remains among the largest."
Added Dan Cunningham, chairman of the Alliance's market research committee and president and CEO of Potomac Systems & Technologies, "The rapid growth in shipments is built on a solid foundation. The smart card-based systems already deployed will combine with developing sectors like transit and access control to keep industry growth strong for years to come."
For now, though, card payment innovation in the U.S. tends to revolve around the automobile. For instance, in a pilot by a McDonald's franchisee in West Islip, N.Y., customers will be able to quickly charge their drive-thru orders using their bank cards and Hypercom terminals. Amex will process the transactions. (For more about drive-thru service, read "Card Agreement Will Make Fast Food Faster," banktech.com eNews, Sept. 19, 2002.)
At the filling station, the Mobil Speedpass uses radio frequency wavelengths emitted from the pump to garner an identification code from a key chain fob, which acts as an antenna. The RFID technology standard used by Speedpass has a short-proximity "read range" of about four inches. "Active RFID," a related technology used by automated toll road systems such as EZPass, boosts the read range by including a battery in the identification unit; in this case, a windshield-mounted device.
As with RFID, the ISO 14443 standard for contactless proximity cards uses a radio frequency interface, but with protocols that can transmit more than just a simple ID. "The RFID is used to refer to devices that have a straightforward ID that's translated into a card number after it's been passed to the merchant," said Murdo Munro, vice president, mobile commerce, MasterCard International.
Toward the marketing end of the spectrum, there's the Discover 2GO, a kidney-shaped magnetic-stripe credit card encased in a lightweight plastic key chain accessory. Now, consumers can pay for gasoline, sundries and other goods by taking out their keys rather than their wallets. However, many card-swiping machines, self-service terminals and ATMs don't accept kidney-shaped objects, thereby limiting 2GO usage to a subset of Discover's installed terminal base.
Although the industry has yet to justify the replacement of millions of U.S. merchant terminals and ATMs to accommodate smart cards, contactless cards, mobile payments or other form factors, initiatives in Europe show that change to the U.S. payments infrastructure may be imminent.
In Europe, the business case revolves around stopping fraud. The Association for Payment Clearing Services (APACS), a self-regulatory banking entity in the U.K., estimates that U.K. card fraud losses reached British Sterling 411.4 million in 2001, a 30 percent increase over the previous year. The industry plans to upgrade all card-reading devices to accept chip by the end of 2004.
Accordingly, Abbey National, the sixth-largest U.K. bank, will issue over three million chip-enabled, PIN-based bank cards to holders of its debit and credit cards starting early next year. In preparation for the switch, the bank has upgraded over 3,000 NCR ATMs and will revamp its back office operations using S2 Systems' ON/2 platform.
But reducing fraud isn't the only reason to adopt the PIN-based chip cards. "Although we do believe this will have large benefits for us in terms of bad debt provision and fraud losses, we do see some other specific business benefits around it," said Kevin Childs, spokesman for Abbey National.
Nonetheless, the bank will stick to the basics for the time being. "We haven't actually added any functionality to the card," said Childs. "We've got to concentrate on getting the core bits down."
To start, the bank must get its customers accustomed to having a PIN for credit payments. "The idea of using PIN at the point-of-sale, all of the time, is going to be a bit of a culture shock," said Childs. "Consumers like security features to be like an airbag-they don't want any inconvenience."
PIN validation on a chip card will curtail fraud. "By introducing PIN, you now have something you have the card, which presumably can't be replicated, and something you know the PIN which can also be validated by the card," said George Ogden, market development director, EMEA, S2 Systems.
At the same time, customers attempting to exceed their credit limits may also find themselves foiled. In Europe, the relatively high cost of telecom services has precluded online authorization for transactions below a "floor limit" value negotiated between merchants and their banks. But by placing authorization logic on a chip card, the card itself determines whether to allow a transaction to go through. "You can tune the individual requirements and the risk profiles of individual customers," said S2's Ogden. "You're carrying around your own bank manager, as it were, in a chip."
In turn, the card can implement very specific risk management controls while minimizing the telecom expense. "It will contain parameters like, 'George is allowed to perform five transactions under British Sterling 100 before having to go online,'" said Ogden. The EMV specification contains definitions for approximately 200 different data elements, leaving it up to banks and regulators to determine the details of the implementation along with the permissible applications.
Each time the card goes online, the bank has the opportunity to reprogram the card. Scripts consisting of a short series of program instructions can update any of the EMV data elements. "When the card goes online for authorization, it will be validated as a valid card by the issuer, and the card issuer at that point will have the option of sending an updated script to that card," said Ogden. "If somebody becomes a bad payer, you can cancel the card online."
The price of new services
Ultimately, as chip-enabled cards incorporate new applications, the added benefits should more than make up for the inconvenience of having to remember a PIN. "The smart card was originally introduced to protect against fraud, but the customer doesn't get the benefit except for peace of mind," said Masahiro Omoto, senior vice president and head of IC strategy for JCB International. 'We really need to put on additional services for our customers."