WILD CARDS 1997

DEENA AMATO-McCOY

As smart cards begin to play a role in providing electronic benefits transfer in limited test regions, many supermarket executives believe the technology could significantly enhance frequent-shopper programs and simplify small cash transactions, such as bottle redemptions.

But retailers told SN that the burden of retrofitting front-end systems to read and process smart cards is tempering their enthusiasm for the technology.

In addition, they note that consumer awareness and acceptance of smart cards in the United States is still fairly low.

"It is obvious that a card reader of some type is going to be required to utilize smart-card technology," said Larry Turner, vice president and treasurer for Kroger Co., Cincinnati.

A card reader only seems to be the beginning of supermarkets' accommodations for smart cards. Some retailers, like Wegmans Food Markets, Rochester, N.Y., expect to have to revamp existing front-end systems even more extensively in order to utilize the technology. This could require investments of $300 to $400 per checkout lane, sources told SN.

"Payment terminals on store point-of-sale systems will need to be either upgraded or replaced in order to accept smart cards," said George Hood, director of electronic banking operations for Wegmans.

"Hardware is just the beginning," said Jacki Snyder, retail systems and electronic payment systems manager for Supervalu, Minneapolis. "If you are adding hardware, you also need compatible software, in addition to modifications as to where [readers] will be placed at the checkstand. This means a lot of restructuring and significant changes to the POS."

G&R Felpausch, Hastings, Mich., however, believes the implementation of government benefits through smart cards may be the push retailers need to undertake these revisions.

"Though no one wants to add additional card-reader units and accompanying equipment, if the government is providing the device, [retailers] may as well make use of the technology in other ways in addition to EBT," said Mike Hubert, vice president of management information systems.

Felpausch will gain smart-card experience in two years' time, when Michigan launches a test that will provide eligible recipients of Women, Infants and Children benefits via smart cards, according to an industry source. So far, the only three states offering government benefits -- WIC and food stamps -- through this medium are Montana, Ohio and Wyoming. "Unless plans change, smart cards will be the only way for us to process WIC transactions, so I guess that Michigan supermarket retailers will become very familiar with the cards in the next couple of years," Hubert said.

As smart cards are launched through federal programs, there is still doubt that this is in fact the best way to provide government benefits.

"My opinion is that right now there are more efficient ways to deliver EBT," said Wegmans' Hood. "Until there is a wider scope of usage, this is not a real solution vehicle."

"It will take at least to three years for smart cards to even emerge as a growing trend, even in the government benefit arena, just to get customers comfortable with using the technology," said Supervalu's Snyder.

Smart cards, plastic cards similar in size to magnetic-strip cards, house a microprocessor chip that can store immense amounts of data, including preset amounts of money and customer-specific information. Industry sources estimate smart-card costs range between $3 and $5 each, as opposed to magnetic-strip cards that cost about 50 cents each.

While smart cards are used for payment and loyalty programs in European supermarkets such as Edah Supermarkten, Amsterdam, Netherlands, and Albert Heijn stores operated by Ahold, Zaandam, Netherlands, test environments for the technology in North America are just beginning to be created.

The cards were tested during the 1996 Summer Olympic Games in Atlanta, and according to industry sources, they are also being used on a limited basis in other controlled environments, such as college campuses and theme parks.

As previously reported in SN, an interoperability test will be launched next month in Manhattan's Upper West Side. Chase Manhattan Corp., New York; Citibank, New York; Mastercard International, New York; and Visa International, San Mateo, Calif., are preparing to commence a smart-card program including 50,000 cards and 500 merchants -- including a sampling of supermarkets.

The cards, which will be used as a payment vehicle, will operate both as a stored-value card and as a conventional magnetic-strip credit card. The cards will reportedly be reloaded through designated automatic teller machines.

Once the technology finally makes its mark in the supermarket industry, executives do expect the cards to make an impact on frequent-shopper programs.

"Value-added opportunities are where the long-term attractiveness of the card lies," said Wegmans' Hood. "It may be strongest in loyalty arenas because there are more options to deliver value to customers electronically rather than through paper."

"Since the cards have electronic 'buckets' that store information, they could be a strong asset in the area of frequent-shopper programs," said Kroger's Turner. "All purchase history could be stored right on the card as opposed to keeping information on an in-store data warehouse."

Supervalu's Snyder described a possible scenario of how the cards would function in a loyalty program.

"The smart card could be programmed to offer customers a $5 reduction in their bill after spending a specific amount of money. The incentive could be loaded on the card [at the POS] and on the next shopping trip the $5 would be automatically deducted from the bill," she explained.

One application that is getting mixed reviews from the industry is providing gift certificates through smart cards. Sutton Place Gourmet, Rockville, Md., launched smart-card gift certificates in its Woodbury, N.Y., store last summer. When asked if this would be an area to pursue, executives showed some hesitation.

"I could see where this would be a good application," said Snyder. "Rather than issuing a paper certificate, customers get a plastic card for a predetermined value, only to be spent at that store."

Wegmans and Felpausch, however, question the cost of the smart-card certificates as opposed to traditional certificates. "I can see them used more in this environment, but it could be an expensive alternative," said Wegmans' Hood.

Felpausch's Hubert agrees. "Though they make a certain amount of sense, it all comes down to the cost of issuing this piece of plastic," he said.

"For example, if a customer asks for a $5 gift certificate and it costs $1 to issue the smart card, then it doesn't seem efficient for the retailer," he said.

On the other hand, executives did present other possible uses. "We've heard scenarios where smart cards would be used in lieu of payroll checks," said Kroger's Turner. For example, a monetary value could be stored on the card, eliminating the need to issue a paper check or stub.

Another possibility is bottle redemption amounts could be directly credited via smart cards.

"In areas of small cash transactions, such as bottle redemption, smart cards can eliminate the task of taking the redemption credit to the customer service center for cash," said Wegmans' Hood. "Instead, the redemption value would be directly credited to the smart card, eliminating the need to physically transfer cash between associate and customer."

Before any of these visions can become a reality, one point is clear: the cards will only be used if they represent a value to customers.

"If our customers see a benefit, that will acclimate them to wanting to use the cards," said Hood.

"It is going to be up to the consumer to choose to want to use smart cards," said Kroger's Turner. "We tend to react to our customers, so I don't think we are positioned to introduce smart cards until our customers really see their value. But that is not to say that will not happen."