Credit cards get smart

Nation's Business, Dec, 1985 by Karen Berney

Credit Cards Get Smart The U.S. credit-card industry is adopting information-processing technology to deter credit theft and fraud. Use of a customized microprocessor implanted in the plastic cards was pioneered in France 10 years ago, but only now has the U.S. industry seized on the enormous potential of these "smart cards."

First out of the gate is MasterCard International, which has issued computer chip cards to 40,000 test customers in Columbia, Md., and Palm Beach, Fla. It hopes to begin distribution in 1987.

Stored in each circuit's memory is the cardholder's name, account number and a personal identification number designed to ensure that no one but the owner uses the card. The card is inserted into a special point-of-sales terminal connected to a central computer, and the amount and identification number are entered to complete a purchase.

Visa says it is developing a "super smart" card combining a computer chip and a calculator-like keyboard with buttons for credit, checking and savings account transactions. Still 18 months away from introducing a prototype, Visa says its smart card would not need special terminals.

American Express and the other major credit card firms "will not want to be perceived as technology laggards," says Blair C. Shick, an analyst with Arthur D. Little, Inc., of Cambridge, Mass., and will be moving into smart cards themselves.

A magnetic stripe card costs about $1.50 to produce compared with an estimated $1.95 for the integrated circuit version. And it will cost close to $40 each to upgrade existing terminals to read and process smart card data, says MasterCard executive vice president John C. Elliot.

The question is whether the savings gained from stopping fraud--a problem that will cost the industry $300 million this year--will justify adopting chip technology now. Visa thinks not, and while preparing to launch its super-card in the late 1980s, argues that greater security can be achieved for less in the interim by simply upgrading magnetic stripe technology.

An enhanced magnetic strip card, which the firm will issue in a pilot test early next year, uses a "watermarking" technique to make the information contained in the stripe unalterable. Unlike the chip cards, the enhanced card would not require merchants to buy new point-of-sales terminals to read them.

Both MasterCard and Visa say the success of smart cards depends on the development of voluntary, industrywide standards to encode and transmit information.

To ensure smooth conversion, MasterCard has set up a standards steering committee that includes representatives from both Visa and American Express.