How smart are smart cards?

Northwestern Financial Review, Sep 1, 2001 by Bengtson, Tom

Sometimes it's not so bad being the little guy. It's good to sit back and let the biggest players in the financial services industry figure out whether there is any practical use for some of technology's flashy offerings. Consider smart cards. For years, I have heard the little plastic card with a computer chip on it would revolutionize the payments system. While the cards are popular in Europe, the truth is they are a flop in this country. That is, so far. Perhaps they will become an important part of the payments system someday, but let the biggest players in the industry spend billions of dollars to try to get us to that point. If American consumers ever decide they really want smart cards, then community bankers can begin to offer them.

I was intrigued by an announcement from Target Corp., the big retailer, that it would start putting computer chips on its Target Visa cards. Card readers will be installed at all of its stores and consumers will be able to use electronic coupons they download onto the cards from the Internet. It's a nice gimmick but it will take more than a fancy discount coupon to convince most people they need a smart card.

American Express has issued more than 2.2 million smart cards, which it is calling its Blue card. Visa and MasterCard are preparing to issue millions of smart cards over the next two years. But I ask, why? Smart cards are clearly a solution in search of a problem. In Europe, where fraud rates and telecommunications costs are higher, the smart card has a useful application as a kind of electronic cash. But the e-cash idea hasn't taken off here. Even when Americans buy products over the Internet, they prefer to use credit cards, which ironically are less secure than smart cards. Most consumers don't want to buy and install the card reader they need to use smart cards on Internet purchases. Compaq, however, has said it will start manufacturing computers that have built-in card readers. We'll see whether new computers unleash a tidal wave of smart card usage in this country.

If the forces behind smart cards ever come up with a truly compelling reason to use the product, and consumers adopt the technology, community bankers will be there to offer smart cards to their customers. It's nice community bankers don't have to spend the money to try to get the American consumer culture to that point. Sometimes, there are advantages to being the little guy.