Banks Release Smart Cards

The U.S. has lagged behind Europe when it comes to smart-card technology, with New York-based American Express Co.'s Blue card being the only credit card on the market with an embedded chip.

But that's about to change, as three banks have announced plans to release Visa smart cards. Providian Financial Corp. in San Francisco and FleetBoston Financial Corp. in Boston are launching the cards this month, and First USA Bank NA in Wilmington, Del., will launch them sometime in the fourth quarter.

According to bank officials, the cards will provide greater security for online shoppers, reduce costs for Web merchants and allow for services such as electronic ticketing.

"The technology and economics now make it viable," said Jay H. Lee, a senior vice president at FleetBoston.

A year ago, the embedded chips cost $12 each; now, the price has dropped to around $3 each, Lee said. In addition, the industry has started to converge on standards - Java Card for the applications that are stored on the smart-card chips and Europay MasterCard Visa (EMV) for payment processing.

"This is the standard," said Theodore Iacobuzio, an analyst at TowerGroup in Needham, Mass. Not all cards use EMV yet; many European systems use proprietary standards, as does American Express with its Blue card. "But people are moving in that direction," he said.

There are two hurdles to widespread adoption, said Frank Prince, an analyst at Forrester Research Inc. in Cambridge, Mass. Consumers have to be persuaded to use them, and merchants have to shell out the money to install smart-card readers. "It's a chicken-and-egg problem," he said.

The banks will try to overcome that problem by issuing free readers to their customers. Providian, for example, will give out 50,000 readers. After those run out, customers will be able to buy them for around $20 each, according to David Alvarez, who heads the integrated card business at Providian.

The readers will allow smart cards to be used with online merchants, which only have to install software.

Merchants with brick-and-mortar stores, on the other hand, will need to install new readers to accept the cards. It's for that reason that smart cards will continue to also have a magnetic stripe for many years to come, Iacobuzio noted.

The cards will also have embossed numbers for those merchants that still have nonelectronic swipers.

Meanwhile, a handful of other Visa card issuers are expected to release their own smart cards in the next few months, which will encourage even more merchants to get involved, Alvarez said.

Copyright © 2000 IDG Communications, Inc.

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