- The Washington Times - Tuesday, December 19, 2000

Imagine a single card that lets you purchase and download an airline ticket using your PC. The same piece of plastic could pay for a restaurant lunch, open secure doors at the office, check out books at the library. It could even become your car keys.

Sound like a script from "The Jetsons?" Not really.

Such is the promise of "smart cards," wallet-sized plastic cards with embedded microchips that major U.S. credit-card issuers are rolling out in a big way in the next few months.

Smart cards, albeit with limited uses, have been popular for years in Europe and parts of Asia and Latin America. The industry says it has shipped more than a billion a year since 1998.

In lieu of change, the cards are widely used for pay phones. In some types of cellular phones, they are used for security, billing and storing frequently used numbers. The financial sector also likes them: In France, every Visa debit card has an embedded chip.

Despite pilot projects, smart cards have never been a commercial hit in the United States, however. For U.S. card issuers, there has been inadequate financial incentive, while retailers have shown little interest in acquiring new card readers to replace the magnetic-only variety.

Some financial powerhouses are betting they can change that now. They are banking as first adopters on the estimated 35 million on-line shoppers almost double that of last year who are looking for secure ways to shop and add value with exclusive discounts and other promotions.

In September, Visa USA joined three of its top 10 credit-card issuers First USA, Providian Financial Corp. and Fleet Boston Financial Corp. to offer a suite of services led by secure on-line purchasing. To entice consumers, they are throwing in free PC card readers and touting introductory rates as low as 0 percent with no annual fee.

Meanwhile, MasterCard, for whom big markets include Brazil and Japan, announced last week that it would be introducing its own smart card in the United States beginning next month offering secure identification as well as credit and debit functions.

Microsoft, predictably, is also in the game. Software for smart card readers is included in its Windows 2000 operating systems.

The incentives for the credit-card industry are great.

First, chip-card use could considerably reduce the $1.09 billion that credit-card companies lose annually to fraud, according to the Nilson Report, an industry newsletter. And with the per-unit cost now down to $3, compared with $12 a year ago, the cards now are much more economical to deploy.

Though smart cards are expected initially to be used commercially in the United States as little more than secure electronic purses and ID cards, experts predict myriad uses starting next year.

Thanks to the improving power and versatility of microprocessors embedded in the cards, consumers will be able to better protect themselves against on-line fraud as they bank or trade stocks. They will also be able to store digital cash, personal information, Web site passwords and addresses, and such things as loyalty coupons from merchants or frequent-flyer points.

As circuits on the cards are upgraded to hold more memory and functionality, cardholders eventually may be able to store everything from driver's license information to medical insurance data and monthly rail or bus tickets all on a single card.

The Visa move comes on the heels of the September 1999 launch of American Express's Blue, a chip-embedded card that allows consumers to transfer credit-card information securely on line with the help of a card reader. By year's end, American Express expects to sign up 4 million users.

"We're seeing some enormous steps forward," said Donna Farmer, president and chief executive officer of the Smart Card Forum, a nonprofit association largely financed by membership dues from 200 corporations and universities.

Worldwide sales of smart cards are expected to skyrocket to $8.1 billion by 2004, from $2.4 billion this year, with about 40 percent to 50 percent of that growth from the United States, according to Dataquest, the research arm of Gartner Group.

Why the big push now? After all, just two years ago Master Card International, Visa USA, Citibank and Chase Manhattan Bank ended a smart-card trial on Manhattan's Upper West Side after just one year in operation.

Smart-card executives say that project bombed because customers were confined to just one part of the city.

Promoters say smart-card use by retailers was hurt in Europe by high telecommunications costs incurred as merchants attempted to authenticate transactions a situation that has now changed with plummeting tariffs.

That's not a problem in the United States, says David Robertson, president of Nilson Report.

And the security enhancements are a big plus:

When shopping on line, customers stick the card in the reader, and punch in their personal identification number (PIN). At a restaurant, the user needs to have the PIN number to unlock the card.

If the card is stolen, the account is deactivated and customers receive a new card with key account information restored on the chip.

While smart cards are appealing to consumers by offering another level of security for on-line shopping, their prime lure to card issuers is their role as relationship-builders with merchants, said Charles Walton, senior vice president of TKI, a security consulting firm in Mountainview, Calif.

Issuers face considerable challenges, however.

On top of the lifestyle changes involved and twisting the arms of "technophobes" merchants will need convincing because it is they who must upgrade magnetic-strip readers.

At the same time, computer manufacturers will need to incorporate card readers into their PCs and laptop computers as standard equipment.

To date, smart cards have been successful in confined U.S. rollouts, from college campuses, where students use them to pay for books and meals, to the Pentagon, which began using smart cards in the 1980s to track soldiers.

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