Here is an excellent overview on the smart credit card issue by Melissa
Allison, who reports on banking and financial services for the Chicago
Tribune.  It separates the hype from the reality.

kelly

Chicago Tribune

 NOT TAKING OFF
   THE U.S. IS STILL NOT FULLY PREPARED FOR A NEW WAVE OF SMART CARDS
   THAT MAJOR BANKS PLAN TO LAUNCH.

   By Melissa Allison
   Tribune Staff Writer
   November 2, 2000

   It has been a long time in the making.

   For more than a decade, the U.S. banking industry has boasted that it
   was going to give customers so-called smart cards--amazingly powerful
   credit cards with computer chips to store everything from checking
   account balances to health-care information.

   France had done it, Germany had done it, the United Kingdom and parts
   of Asia had done it.

   Now, at last, smart cards have arrived in the United States.

   American Express has blitzed the market with its hologram-stamped
   "Blue" card, and three major banks are launching programs this fall to
   promote Visa-developed smart cards. First USA, the credit card unit of
   Chicago-based Bank One Corp., sent mailings this week hawking its new
   First USA Smart Visa.

   But the amazing powers part of the equation is lacking: Although smart
   cards cost about $3 to produce, versus 25 cents for a traditional
   magnetic-stripe card, the most exciting thing they do in the United
   States, at least right now, is to make online shopping more secure.

   "The reality is they don't do very much," said Robert McKinley, chief
   executive of CardWeb.com, a Frederick, Md.-based firm that tracks the
   payment card industry. "They're more of a marketing gimmick, a way for
   these banks to appear cutting-edge."

   The promise of a smart card is that it can be used in telephones,
   vending machines, at department stores and drugstores; it's a card
   that could track frequent-flier miles, act as a hotel room key and
   store value for mass transit.

   Smart cards are capable of that.

   The problem is, very few places in the United States can read the chip
   on a smart card.

   Banks and merchants chose magnetic-stripe cards over the more
   sophisticated smart cards in the 1980s and early 1990s because the
   magnetic-stripe system was--and still is--less expensive. Besides the
   lower cost of cards, the U.S. telephone system, over which information
   contained on magnetic-stripe cards is transferred, is affordable, in
   contrast to countries that have deployed a smart-card system.

   Visa estimated in early 1999 that it would cost more than $11 billion
   to convert the U.S. to a smart-card system.

   So why offer smart cards here at all? In short, three reasons: the
   growth of online shopping, the halving of smart-card manufacturing
   costs and a recent Justice Department antitrust lawsuit that accuses
   card giants Visa U.S.A. and MasterCard of stifling competition, in
   part by hindering smart-card development. The judge has yet to
   announce his verdict in that case.

   Visa and MasterCard, which have more than 75 percent of the U.S. card
   market, argued this summer that they had found no business case for
   offering smart cards--with no apparent demand, the expense couldn't be
   justified.

   This fall, however, after American Express' smashing success with
   Blue, they apparently found a case. Visa is pushing its new smart
   card, and MasterCard officials say they are in smart-card discussions
   with a number of large institutions. Both non-profits, which are owned
   and run by banks, deny that their intensified efforts stem from the
   antitrust litigation.

   "The pursuit of a business case has driven us," said Diana Knox,
   senior vice president in charge of smart-card applications at Visa
   U.S.A.

   Visa decided last year that to make smart cards work for its bank
   members, the cards had to offer more than payment capabilities. And
   they do: They come with card readers that attach to personal computers
   to transmit data directly, making online shopping easier and more
   secure.

   The cards and readers also assure Internet merchants that consumers on
   the other end of a transaction have a card in hand, which should
   reduce fraud and payment disputes. That means merchants and banks save
   money, Knox said.

   But that's about all the new cards do that the traditional
   magnetic-stripe cards cannot. In fact, U.S. smart cards carry magnetic
   stripes to handle most transactions--the ones people make at
   department and grocery stores.

   Knox and industry observers say that smart-card capabilities in the
   United States will expand quickly, and that eventually they will
   overtake magnetic-stripe cards.

   McKinley expects banks to enter an "applications war" in the next five
   years, in which they will compete based on what their smart cards can
   do. With these cards, banks can "provide a lot more value than they do
   now," he said, predicting that the addition of new services will begin
   early next year.

   "The cards could be gateways to banking and credit, but also track
   investments, insurance, frequent-flier information," McKinley said.

   One hurdle: Merchants will have to acquire equipment to convert to the
   smart-card system. Although consumer demand could drive the
   transition, some experts say merchants will need other incentives.

   In the meantime, McKinley said, issuers are trying to force the
   migration to smart cards by getting them into people's hands.

   Indeed, the cards tend to offer more perks than your average credit
   card. They come with discounts and rewards programs, no annual fees
   and free smart-card readers.

   They also enjoy the intangible benefit of looking cool. At a time when
   many cardholders showboat about the silver, gold or platinum qualities
   of their cards, how could the sight of a technology-age microchip
   hurt?

   American Express has had little trouble convincing people to carry its
   Blue card, which was so swamped with applications when it debuted last
   fall that some people had to wait several weeks for their cards.

   In the year since then, American Express has issued at least a million
   Blue cards, and probably more like 2 million or 3 million, according
   to industry watchers. Company officials will not disclose the figures.

   "It far surpassed our expectations," said Judy Tenzer, an American
   Express spokeswoman.

   "Blue made everybody stand up and take notice."


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