ELECTRONIC PAYMENT SYSTEMS

MARTY SONNENFELD

Despite several successful smart-card rollouts in a variety of industries, as well as widespread use in Europe, supermarkets in much of the United States remain skeptical about taking the plunge into this new technology, mainly due to costs associated with the electronic cards.

The card's microprocessor chip can store pertinent information specific to the cardholder, ranging from medical records to cash values. They also allow retailers to store and access large amounts of information, such as frequent-shopper data, directly on the card. This would eliminate the need for a retailer to extract data from databases residing on mainframe and client-server networks.

However, costs associated with transaction processing and retrofitting front-end systems to read the cards, as well as a lack of standards from the U.S. financial services industry, are encouraging retailers to wait for more widespread use of the technology.

"We are not using smart cards," said William Laurie, retail systems analyst for Twin County Grocers, Edison, N.J. "Our primary concern is the cost of upgrading equipment."

Giant Food, Landover, Md., agreed that costs related to implementing the technology remain a hindrance. "The bottom line is simply who pays for the equipment and who pays for the transaction fees," said Jay Nelson, senior manager of electronic transaction services for Giant Food.

Despite worries about costs, many retailers have been watching smart cards' deployment through electronic benefits transfer rollouts in Ohio and Wyoming. Even Missouri retailers, who initially showed concern about food stamp benefits issued on smart cards, were calmed when the state began paying stores 30 cents for each cash-back transaction processed.

Smart cards have generated considerable usage, and a fair amount of buzz, in Europe but conditions in the United States have not been as conducive to smart-cards' growth.

"In the States, there are about 10,000 commercial banks, compared to about half a dozen in France," explained a source familiar with the situation. For example, "France's 'Cartes Bancire,' which dictates standards, decided to issue smart cards," helping make them the only game in town.

"The telecommunications infrastructure in the U.S. is established and decreasing in cost," said another source. "Merchants here have the ability to handle on-line transactions more easily and cost-effectively than overseas."

Smart-card pilots in Canada have been more successful than in the United States, because sources say Canadian banks have formed a universal network. "Canadian banks are making investments now to support future large-scale smart-card rollouts, and U.S. banks with a presence in Canada may move ahead a little faster with smart cards in the States," converting all of their equipment at the same time, the source added.

Instead of a magnetic-strip typically found on credit, debit and some loyalty cards, smart cards use an embedded microchip capable of storing extensive data. Existing point-of-sale magnetic-strip readers cannot accept smart cards, thus retailers would need to retrofit their existing front ends with a smart card-capable terminal.

"It is way too early for us to consider buying new equipment because the technology is still so new and very subject to change," said Mike Hubert, vice president of management information systems for G&R Felpausch Co., Hastings, Mich.

Pay Less Supermarkets, Anderson, Ind., boiled it down to needing to sense a demand for the technology before committing to a conversion. The retailer also remains unconvinced of smart-cards' data storage and processing time benefits.

"I don't see the advantage of having more data available to the front end without also having more horse power at the front end," said Paul Nicholson, vice president of finance and management information systems for Pay Less.

"Cash basically works fine -- for us and the customers. Magnetic-strips work fine, and they let us do pretty much everything a smart card might do," he added.

Consumer demand for smart cards may increase if other benefits of the technology are demonstrated. "The ability to write prescriptions directly to a smart card, and then plug it in at the pharmacy may interest consumers and impact supermarkets' pharmacy departments," suggested a source.

Nicholson added that demand may also be spurred by integrating frequent-flyer and hotel programs, car-rental information, "even storing medical histories to enable quick access by emergency workers."

"Smart cards have a lot of chicken-and-egg associated with them," said a source familiar with the situation. "In order to use the cards, you need to have the terminals. And to invest in installation of the terminals, you have to think customers will use them."

Even if smart card-enabled terminals were installed instantly tomorrow, sources told SN, the technology would remain stagnant due to a lack of support by the financial industry. 'Financial institutions in the States do not support smart cards and consumers don't have

them," he said. "So why replace perfectly good magnetic-strip equipment?"

While smart cards are favored by users for their ability to store data, including customer buying behaviors, Nicholson explained that current systems serve Pay Less' needs adequately.

"I could offer a discount on Van Kamp's pork and beans to customers who usually buy Campbell's. I don't need a smart card to do that," said Nicholson. "We can easily track purchase patterns through our store systems, rather than storing data on a smart-card's microchip."

While federal and state governments are moving to EBT, only a small number of programs are currently using smart-card technology.

Caution about smart cards is not to suggest that U.S. retailers don't like offering alternate payment methods. "Customers have become quite comfortable with credit and debit cards," said Hubert, noting electronic payments now account for approximately one-third of total sales at many Felpausch stores.

"As soon as we see customers asking to use smart cards, we'll make the right moves," he said.

The potential expense to process smart-card transactions also concerns U.S. supermarkets. "As a retailer, a 1% or more than 1% discount [transaction fee] is outrageous, and pretty tough to swallow," said Giant Food's Nelson. Currently retailers are battling what they see as high transaction fees for other forms of electronic payments.

Pay Less cited other problems. "Adding a second reader would expand the footprint in the lane," said Nicholson. "Converting to what are called universal readers -- which are really two very different technologies housed in one box with two slots -- would be cost

ly. Either way, it is impractical for us."

According to a smart-card terminal supplier, however, a major national drug-store chain is installing 25,000 new card terminals that are equipped to handle smart-card transactions.

Increased competition, including a recent announcement from Motorola, Schaumburg, Ill., that stated it will accelerate the growth of its smart-card group, may also drive the equipment costs down.

Intellect Electronics, San Jose, Calif., will reportedly unveil a new home terminal for smart cards this month, called the Micro Bank Home.

As applications grow, the terminal supplier believes the device, which will sell for less than $100 in the United States, will permit many other types of data transfer.

"We're always looking toward the future, but we don't know what it looks like yet," said Mickey Clerc, an official for Winn-Dixie Stores, Jacksonville, Fla., a retailer that does not currently use smart cards.

"I absolutely think that smart cards will become very popular. That cashless society they've talked about is getting closer and closer, but it is still a long way off," said Felpausch's Hubert.