Smart cards, also called chip cards, are old news for many. Most people are aware of their applicability to payments, but have seen many programs fail in the US. Target's rescindment of its smart card program last year seemed to many to seal the fate of the cards in the US. Many businesses have a rather grim outlook on the adoption of smart cards in this country and have shelved their smart card initiatives. However, the movement is not one of extinction, but rather one of hibernation. Those close to the payments industry and with an eye on the progress of smart technology know that smart cards will one day take over magnetic stripes and revolutionize the payment industry. It is only a matter of when and how. Industry estimates of when smart cards will have a strong US presence range from five to 10 years and beyond. Celent does not expect them to have a significant presence for at least seven years.
Celent believes that several factors will determine the fate of smart cards. Some have been known in the market since the decline of the first American smart cards, while others may come as a surprise to those who have had their eyes set on the wrong horizon. They include the proliferation of smart card technology across industries, elimination of cash-based systems, rise in fraud, and the global migration of smart card-enabled payments. No one factor is necessarily more important than another. Every factor is affected by at least one other, so isolating the effects of any one of these issues is virtually impossible. Together they weave an intricate web of events and forces that will ultimately drive the adoption of smart cards in the US.
EMV: The shift in liability associated with EMV is driving many banks to issue smart cards. Under many EMV rules, responsibility for liability fraud that could have been prevented by chip technology will fall on the party that has not made the upgrade. Aside from the threat of increased liability, merchants and banks are being incentivized by lower or higher interchange rates for transactions made with chip cards or POS systems.
Proliferation of Smart Card Technology: For years people have looked at smart technology and its potential, but have hesitated due to the traditionally high cost. Historically, smart card applications were reserved for industries that had either high-margin businesses, a need for strict security, or products for which a one-time fee could be charged to cover the cost of the chip. However, the cost of manufacturing smart technology has dropped significantly over the last few years. The reduction in cost has led managers in low-margin businesses to realistically consider the potential and applicability of smart card technology. The use of smart technology across applications and industries will begin to create familiarity with the technology, not only among managers, but also consumers. This familiarity will come as an epiphany to some as they discover that they have been surrounded by the technology without realizing it. Smart technology's proliferation through all industries, including payments, is most likely inevitable.
Elimination of Cash-Based Systems: The evolution of payments has always been guided by convenience and the cost of doing business. As purse technology evolves, it will become easier to replace cash transactions as well, particularly at locations servicing low-value transactions. Smart cards will also become preferred as business owners realize smart card readers, particularly RF ones, require less maintenance than magnetic stripe readers and currency feeds.
The Rise of Fraud: The US card industry has enjoyed low rates of fraud in recent years. As such, the anti-fraud benefits of a smart card have done little to motivate US adoption. This is certainly not the case in other countries that have experienced astronomically high rates of fraud. Although Celent does not believe that the rise of smart card use in other nations will drastically drive fraud to the US, the existing rise in skimming scams and related frauds in the US, coupled with the increasing use of payment cards will likely push the industry to consider the ennhanced security of a smart card.
International Expansion: Issues of fraud notwithstanding, smart card use in other countries will create pressure in the US to move to smart cards. The movement to smart card programs is beginning to span the globe. Regions around the world are beginning to implement smart card programs, with many of them making such programs mandatory, while others are beginning to lay the foundation for what is to come.
The crystal ball for smart cards in the US is cloudy. Too many factors will ultimately have an effect on the timing and strength of adoption. Answering the "when" part of the smart card question is a bit trickier, as several variables will impact the outcome. The speed at which other countries implement EMV and phase out magnetic stripes will affect the timeline; so will international travel volume. Should a disaster occur that impedes the international travel industry, universal card use and acceptance will be stymied. Another factor is the migration of chip and the speed with which criminals find a way to crack smart cards. Should one happen before the other, the movement of fraud will be affected. Movement will also be affected by concurrent measures to stop crimes such as identity theft, which could give criminals an alternative to compromising cards in their country. So much uncertainty does make planning difficult. Ultimately, smart cards are a payment product and must be driven by the financial services industry, not merchants or consumers. If they were left up to the latter two, the classic card conundrum would take effect and lead the industry nowhere. It is a game of monkey in the middle, and the financial institution must grab the ball and run with it.
Ariana-Michele Moore is a senior analyst within the banking group at Celent Communications, a global research and advisory firm focused on the application of information technology in the financial services industry. She can be reached at [email protected]