Banks Get Smart About Computer Chip Cards

Chip-based smart cards, largely shut out of the North American boom in plastic usage, are beginning to make a run at magnetic stripe cards, industry observers say.

The number of smart cards manufactured for use in North America climbed to 28.43 million in 2000, up from 20.77 million in 1999, according to a study by the Smart Card Alliance and KPMG. Smart card usage in North America jumped 37 percent in 2000.

The fastest growing market segment is financial services, with a growth rate of 244 percent between 1999 and 2000, reflecting the response of card associations, banks and American Express to consumer demand for expanded card services. By early 2001, United States financial institutions had 17.5 million chip cards in circulation, according to TowerGroup.

American Express was first out of the chute in 1999, when it launched Blue. After only 18 months, Blue accounted for 10 percent of all U.S. Amex cards, and should hit about 10 million cards in 2002. It's been so popular that Amex is adopting the blue square as part of its logo.

In 2000, Visa joined the smart card marketing fray, announcing Smart Visa, which is issued by Providian Financial, FleetBoston Financial and First USA. Visa also struck a deal last year with Target, making Target the first United States-based retailer to offer smart cards.

Smart Visa market penetration-via banking institutions and retailers-is projected by TowerGroup to hit almost 18 million cards in 2002.

Citigroup has also announced its own MasterCard-branded smart card. MasterCard International, which has spent five years building its smart card infrastructure in the United States, is preparing a wider-scale rollout.

In use since the 1970s, smart cards include popular prepaid long distance or wireless phone cards. The telecommunications industry also uses smart cards in wireless handsets, which allows users to store phone numbers, play games and select fancy ringing tones or songs.

For these reasons, smart cards have traditionally been more popular in Europe and Asia, and in countries where the telecommunications infrastructure isn't as strong and wireless is popular.

"Surprisingly, there's a high level of adoption around the world," said Mark Sievewright, president of TowerGroup.

In the financial services industry, smart cards are used in electronic purses, bankcards and online payment systems. Used with a reader connected to a PC, smart cards access financial information and store applications. Smart cards are also gaining ground in the retail, transportation and healthcare industries.

Unlike magnetic cards, smart cards can support multiple applications, which allows the delivery of more than one service and eliminates the need for multiple cards. Still, only six percent of cards issued by financial institutions are chip-based.

With credit card fraud on the rise, smart cards offer advantages over magnetic cards. Integrated circuitry makes them difficult to tamper with. They have more complex file and data structures. PINs and photos can be digitized and stored on the card. Add a dollop of biometric security, where fingerprint or iris scans are incorporated to work with a scanner, and the cards become close to impregnable.

It's on the security front that smart cards provide the best marketing opportunity for financial institutions.

"We're seeing people becoming increasingly more aware that smart cards are the best tool to promote security and enhance privacy," said Donna Farmer, president of the Smart Card Alliance.

Other factors also weigh in favor of smart cards. With 40 percent to 50 percent of the point-of-sale systems and ATM terminals in the United States due to be replaced in the next five years, manufacturers have a low-cost opportunity to incorporate smart cards into their products.

But the pricey nature of smart cards may be keeping the technology from gaining wider acceptance. Although the cost of chip cards is dropping quickly, it is far from being on par with a magnetic stripe card. The cost of a fully-loaded smart card is now $1.62, down noticeably from $3.50 in 2000, said Sievewright. Meanwhile, a magnetic stripe card costs 50 cents.

The price of the smart card rollout, moreover, isn't cheap at $13.5 billion, divided between issuing banks ($3.1 billion), merchants ($7.8 billion) and Visa, MasterCard and American Express ($2.6 billion).

Still, North American consumers appear to like smart cards. Response rates to solicitations seem higher for smart cards than for magnetic stripe versions, according to Sievewright, although he said that's "difficult to quantify."

Activation rates are also higher-95 percent for smart cards versus 75 percent for magnetic stripe cards.