SAFEWAY UK TO ACCEPT CHIP CARDS FOR PAYMENT

JOHN DAWSON

HAYES, MIDDLESEX, U.K. -- In a move to reduce fraud, Safeway UK based here plans to become the first U.K. retailer to accept credit and debit cards embedded with microchips and validated via a personal identification number -- known here as "chip and PIN" -- throughout its 480-store chain.

The move is part of a national movement in the U.K. away from magnetic stripe cards that are more susceptible to fraud. The Association for Payment Clearing Services and the British Retail Consortium Banks have set a deadline of Jan. 1, 2005, for conversion to a chip and PIN system at stores, after which non-compliant retailers would be liable for card fraud committed in their stores. The cards are based on the EMV (Europay, MasterCard, Visa) standard.

Business Systems Manager Jeremy Wyman expects to have nearly all stores implemented by the end of the year. "We are now installing 10 or 20 a night and accelerating," he told SN. Safeway is working with IBM, White Plains, N.Y., to deploy 8,000 Ingenico chip-card readers .

Wyman said that the chain has been thinking about the move to chip and PIN for some years. "Then we just decided to get on and do it. There are advantages in being first," he added, " and it's no great difficult task." He declined to disclose a cost for the project but industry estimates put the figure at around $22.5 million.

The cards' silicon chips will identify shoppers at the point-of-sale terminal and, instead of signing a paper slip, they will simply key in their PINs on a small keypad. According to some estimates, card fraud is costing the U.K. retail industry in excess of $600 million each year, and the use of chip technology alone (rather than a magnetic stripe) would reduce card fraud by 35%.

In the United Kingdom, with less complete and affordable telecommunications than in the United States, credit cards are often validated simply by comparing a customer's signature with what's on the card, noted Greg Jones, spokesman for VISA USA, San Francisco. Credit card fraud is less of an issue in the U.S. because this country's telecommunication systems allows mag-stripe cards to be validated online. Consequently, chip-based cards are likely to be far less prevalent in the U.S., though several banks have issued about 10 million Visa smart cards since 2000. Multiple functionality, including rewards, "is necessary to drive adoption in the U.S.," he said. Wyman accepts that, despite Safeway's lead, the chain will still have to employ a dual system that will distinguish between chip and mag-stripe cards for some time to come. There are a sufficient number of chip cards already in circulation in the U.K. to offer immediate gains in security, observers said, but foreign visitors using mag-stripe cards, for example from the U.S., will have to be accommodated.

Wyman is confident that shoppers will adapt quickly to the new system. "Safeway customers have had their fair share of technical innovation over the years and have seemed to thrive on it," he said. While transactions may take marginally longer as the chip and PIN cards are introduced, speeds will increase with usage, he said. "The aim is that, ultimately, store staff should not need to touch the card. The customer will just dip it in the terminal, key in the PIN and shuffle off to the car park."

Other British retailers, including Tesco and Marks & Spencer, are showing less enthusiasm for the change, which retailers will have to finance. Tesco and Marks & Spencer are adopting a two-stage approach, using the chip cards but only replacing signatures with PIN numbers when they feel banks and customers are ready -- probably by early 2004, said one observer.