Not yet embraced by consumers on the street, smart cards may be hard-pressed to score on the Net, too

THE DIGITAL BAZAAR Click for June 22, 1998 issue

"They're hardly being used at all," says Harvey Rosenblum, general manager at Manhattan's Fairway Fruits & Vegetables grocery. He's talking about smart cards, and for card proponents, his words are another dose of bad news in their decade-long struggle to crack the U.S. market.

Fairway is a participant in the New York Smart Card Program, launched with much fanfare in October, 1997, a year behind schedule, on Manhattan's Upper West Side. Initially, the program seemed to hold great promise: It was a large trial, in an affluent neighborhood of a major city, with big names like Chase, Citibank, Visa, and Mondex (a major smart-card outfit in which MasterCard has a 51% stake) leading the effort.

"We see maybe three, four, five [smart-card] transactions a day," says Rosenblum, "not much of anything," considering that 500 to 1,000 paying customers come through Fairway daily.

Despite the allure of a cashless society and growing acceptance of smart cards abroad, not many Americans are carrying them in their wallets. Card devotees, meanwhile, are now hoping that the boom in E-commerce and the cards' ability to ensure security will spark demand for them -- an interesting reversal, as forecasts of just a few years ago figured that it would be smart cards propelling E-commerce.

DON'T LOSE IT. Smart cards get their brains from a microchip, rather than the credit card's magnetic strip. These chips can store reams of data and adapt to fill a variety of applications. They're perhaps best known as "stored value" devices, whereby a cash balance is transferred from a person's bank account to the smart card, which can then be used to buy goods at smart-card-capable stores. Instead of contacting a central computer system to authorize each transaction, as is necessary with conventional credit or debit cards, merchants with smart-card readers handle the transaction themselves. One downside for consumers: Like cash, a lost smart card is money gone forever.

Brainy as they are, the cards have yet to make the case that they're needed. "Not having to fumble for coins is not enough," says Forrester Research analyst David Weisman. And consumers appear quite content with the convenience afforded by credit and debit cards. Says Nicole Vanderbilt, director of digital commerce for research house Jupiter Communications: "It's an education issue: They don't understand the value of another card in the wallet."

The Manhattan test, one of the highest-profile to date, has turned out to be "the same old story: In theory, great ideas, but in execution it's lacking," says Jupiter's Vanderbilt. "Merchants are having a hard time supporting it." The project got off to a shaky start, as bugs had to be ironed out and store owners struggled with the new system. When disaffected merchants aired their gripes to the press and New Yorkers didn't line up for the cards, few transactions flowed.

At a recent presentation for the banking community, one of the project's leaders, Nicholas Massimiano, a vice-president at Chase, painted the New York Smart Card Program as "the beginning of a success story." He reminded outsiders that, despite the hype, it's still a pilot program. "I've never learned as much as I have in the last two years," said Judith Darr, a vice-president and director of the smart-card program for Citibank. Says Forrester's Weisman: "I think, though, that this project was billed as something that was more than a pilot...learning was not enough."

By early May, the project had slimmed down from 650 participating merchants to 450. And though 91,000 cards had been distributed to the area's 100,000 Chase and Citi customers, sales via smart cards totaled just $700,000 in nine months. For their part, project reps say lessons learned so far are being applied to the pilot, as they weigh customer-loyalty programs to boost traffic, work to make the system easier for merchants to use, and try to keep awareness of the project high in the target area. Other positives include demonstrating the ability of the slightly different VisaCash and Mondex products to function together. In short, they say, the technology works.

OPEN WINDOW? Tom Kilcoyne, vice-president for software at VeriFone, which makes smart-card readers, sees a parallel between the negative reaction in the New York pilot test and an earlier test at the 1996 Atlanta Olympics. "In Atlanta people said, 'Whoa! Smart cards didn't take off,'" he says. "But they need to add a word, 'overnight,' to the end of that sentence.... We think there is a window of three to five years for really mass adoption."

Will the Internet be the key to opening that window?

With the explosive growth of E-commerce and increasingly important corporate networks, concrete methods of establishing identity and security, such as digital certificates, are creating difficulties of their own, and smart cards may have a chance to ease the pain. Just as they can store cash, they can store the keys to your digital identity. "What the smart card brings to the equation is security and portability," says Dan Cunningham, president and CEO of the Smart Card Industry Assn. (SCIA) in Lawrenceville, N.J. "Your security keys are stored on the card, not your hard drive. So if you want to use the Net at the office or at home, you carry your security and identity with you." The magic bullet? Built-in smart-card readers on PCs and support for reading the cards in software applications.

But, here too, despite a spate of white papers, press releases, and working groups, few smart-card applications have made it to computer-users' desktops. Still, some big players are starting to get the pieces in place: Hewlett-Packard acquired VeriFone last April and has since announced a keyboard with a built-in card reader. Microsoft delivered a smart-card development kit in August of '97, so that Windows developers could begin allowing for smart-card interaction with their programs. The latest versions of both Microsoft Internet Explorer and Netscape Communicator provide some support for smart-card-based authentication, as will Windows NT 5.0 when it debuts.

Also, the Network Computer specification (championed by Apple, IBM, Netscape, Oracle, and Sun) outlines a common smart-card interface for NCs, and a December, 1997, decree by the PC/SC Workgroup (numbering IBM, MS, and Sun among its members) does the same for PCs. Microsoft's WebTV set-top device has space allocated for a smart-card reader, but it's currently left vacant on shipping units.

Though card-reader components themselves are relatively inexpensive, PC manufacturers, contending with thin margins and fierce competition, are hesitant to add costs before they see clear consumer demand -- continuing the chicken-and-egg curse smart cards can't seem to shake.

EARLY ADOPTERS. Corporate America may lend a hand here. "There are lots of applications for smart card-based security within the enterprise," says Jupiter's Vanderbilt. More flexible office arrangements, and an increased emphasis on network security, might have you logging into a different computer every morning with your smart card. "If corporations are willing to adopt it first, it can then get pushed out to consumers," adds Vanderbilt. Forrester Research agrees, figuring that corporate PCs will sprout readers over the next couple of years, with smart-card-enabled PCs penetrating the consumer market in significant numbers by 2002.

But, "payment systems take a long time to develop and evolve," says the SCIA's Cunningham. And skeptics figure that smart cards won't start catching on in the U.S. until around the turn of the century. Forrester, with a fairly conservative take, predicts that some 4.7 million smart cards will be in circulation in the U.S. in 2002, up from 429,000 in 1997. However, that 4.7 million is still a fraction, less than 2%, of the number of ATM cards that will be in circulation in the U.S. by then.

Says VeriFone's Kilcoyne: "If you're in the smart-card business, you learn to celebrate small victories." You learn patience, too.

By Patrick Lambert, Staff Reporter, BW Online

Updated June 11, 1998 by bwwebmaster
Copyright 1998, Bloomberg L.P.
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