Commentary: What Smart Cards Couldn't Figure Out

Last fall, when ushering in so-called smart cards on Manhattan's Upper West Side, Henry Mundt, executive vice-president of MasterCard International Inc., predicted confidently: "What we're doing today is launching a revolution. It will start here today and expand across the U.S."

The long-awaited test was the nation's first of digital cash outside the controlled confines of a company, military base, or college campus, where the cards are used for purchases and a host of other functions. But now, a year after Mundt's hopeful prediction, it's clear no revolution is in sight. Smart cards--plastic cards embedded with computer microchips that can store cash--didn't catch on in this three-square-mile neighborhood. Indeed, the 60,000 Manhattan residents who carried the cards spent about $1 million using smart cards during the past year, just a fraction of total commerce. That prompted the test's four co-sponsors--MasterCard, Visa International, Chase Manhattan Bank, and Citibank--to announce on Nov. 3 that they will pull the plug.

The problem? Residents and merchants in this middle-class neighborhood saw no clear advantage to these cards. In addition to cash, shoppers handily use credit and debit cards, so why add another piece of plastic to their wallet? Merchants didn't like them, either. The smart-card machines were unreliable, and not all of the devices could process the varied smart cards. Of the 600 merchants who accepted the machines a year ago, fewer than 200 still have them today. Says Scott Goldshine, manager of Zabar's Deli & Gourmet Foods: "There were two different types of smart cards and two different technologies--and four different companies behind it all. Bottom line? Smart cards are dumb, a pain in the neck."

Trouble is, they didn't have to be. Promoters might have had better luck if they had agreed to use a single technology, rather than each backing different kinds of smart-card systems. Many Upper West Side merchants refused to install more than one kind of smart-card reader, or, frustrated, did not install either--despite being given demonstration models at no charge.

More important, the cards might have been more popular if they had done more than simply stash cash for store purchases. Midtrial surveys by Citibank showed that consumers wanted to use their cards to ride the bus, take the subway, or make phone calls. In Manhattan, the only nonshopping use of the cards was also the most popular: laundromats--partly because users thought the cards provided a smidgen of security. "In some laundries, people without the cards couldn't use the machines. So cardholders felt safer, and the wait to use the machines was shorter," says Walter A. Effross, an E-cash expert at American University in Washington, who monitored the experiment.

The wisdom of a smarter smart card should have been obvious. Just look at college campuses. At Florida State University, smart cards have been a hit because they've become practically indispensable: Students there use them to pay their tuition, eat in the cafeteria, borrow library books, rent videos, and gain access to dormitories and online study groups. In Europe and Asia, where the cards are popular, they often store not only money but also personal and corporate data such as medical histories and security clearances.

ONLINE REVIVAL? So what could turn things around for smart cards in America? Promoters should look to E-commerce, where there's a need for a "smart" payment system that can accept small transactions without credit-card-size charges. Some companies already are headed there. Microsoft Corp.--just days after the Manhattan trial collapsed--announced it will unveil a smart-card reader for PCs early next year. And in a pilot with Mondex USA, an electronic-payments firm owned by seven banks, about 40 Wells Fargo & Co. employees in San Francisco have started tapping into the Internet to transfer funds from their bank accounts to their smart cards, then using the cards to buy low-cost items from online stores.

Whether or not E-commerce can give smart cards a jump start in America, the ultimate problem is not with the technology but with the ability of marketers to devise cards that consumers want and need. Until then, as Goldshine says: "There has got to be a simpler way to buy a bagel."

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