Card Companies Chip Away At Price In Effort To Lure Banks to Multi-Application Cards

In a move to spur bank migration to smart cards, MasterCard International has introduced a multi-application card priced at $3, matching an offer made by Visa U.S.A. in September. Although still priced significantly higher than magnetic stripe cards, the new smart cards provide a cost-effective vehicle for banks to tap into lucrative co-marketing deals, card executives said.

The MasterCard product features a version of the Multos operating system developed by Keycorp, an Australia-based smart card manufacturer. Over the next two years, MasterCard and Keycorp expect to roll out 15 million cards to member banks, with an initial concentration in the Asia/Pacific region, where demand for chip-based cards is strongest.

Visa and MasterCard are touting multi-app smart cards as all-in-one platforms for issuer-specific applications including debit, credit, stored value, loyalty programs, travel, etc. American Express launched its own smart card, called Blue, in 1999.

Although intrigued by the possibilities opened up by chip cards, banks have balked at the price. "We've been hearing from the market a long time that we need to drive down the cost of chip cards," said Adam Gluck, vice president of e-business product development at Purchase, N.Y.-based MasterCard.

The aggressive pricing is achieved through economies of scale, officials said. "With Keycorp scaling up to provide these cards, they are keeping their costs down," said Gluck. The card association will extend the pricing to banks around the world through Keycorp and other vendors, and through its Global Chip Member Services program.

Chip card costs have also been steadily declining thanks to technological advances. Five years ago, the all-in cost of issuing a card-including personalization, card graphics, and loading one or more applications-was $11. Two years ago, it was $7 or $8. By last year, it had fallen to $5.

Still, card production itself represents only a fraction of the cost of issuing a smart card. Much of the expense comes from integrating the card with back-end systems. "A smart card strategy is not about a chip. It's about an approach to deploy systems from the card all the way to the back end," said Patrick Gauthier, senior vice president of smart card applications at Visa U.S.A.

The $3 price is for the "white card" only, said MasterCard's Gluck. The all-in cost is between $4 and $6-depending on which applications are loaded-versus 50 cents for a mag stripe card. However, the additional revenue opportunities offered by chip cards more than offset this price differential, Gluck added. "The card issuer gets several benefits, including tying cardholders closer to the issuer, and the chance to rent out space on the card."

The cryptographic co-processor supporting PKI (public key infrastructure) is a unique feature, executives said. PKI employs a dual set of keys to satisfy the basic requirements of an electronic transaction, including privacy, integrity, authenticity and non-repudiation. "PKI is one of the key applications that all of our issuers are asking for," Gluck said.

Visa's smart card, which also has a $3 base price, features a 32k chip running Open Platform, Visa's Java-based operating system. Visa has shifted development responsibility for Open Platform to GlobalPlatform, a San Francisco-based consortium that promotes interoperability among smart card vendors.

The Multos operating system was originally developed by Mondex, a London-based software developer in which MasterCard bought a majority interest in 1996. Responsibility for Multos has since been transferred to a consortium of developers called MAOSCO.

GlobalPlatform and MAOSCO have developed a common approach for card personalization and issuance, so that issuers can use the same procedures for both the MasterCard and Visa cards. "While the operating systems can exist independently, the back offices that personalize these cards can use both of these products at the same time with a minimal effort," said Gluck.

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