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Smart cards: key to cashless economy?

Author: Doug Manchester
Date: January-February 1997
From: The Futurist(Vol. 31, Issue 1)
Publisher: World Future Society
Document Type: Article
Length: 2,535 words

Abstract:
Smart cards can take the place of cash for consumer purchases, reduce the costs of handling money for merchants and help banks
prevent fraud. However, smart cards have yet to gain worldwide acceptance and have raised questions about consumer privacy.

Full Text:
The oft-promised economy is closer to reality, but the challenges loom large.

Imagine a world without cash or coins. Imagine a world where every purchase you make is recorded by your bank. Smart cards are
part of the coming electronic economy. Balancing their advantages and disadvantages looms as a challenge to society. To
understand their future, let's look at how the four major players involved - consumers, merchants, banks, and the government - would
be affected. First, how they benefit.

Convenience for Consumers

Checks are still the most popular method of paying monthly bills. But you could be able to pay them using a smart card and a smart
phone or PC (personal computer). Here's how it might work: First, you download money from your bank account into your smart card.
You can do this either at the bank's ATM or using your PC or smart phone at home or wherever you are. For example, you would
insert your smart card into the smart phone or PC, then scroll through your personal electronic phone book until you find the number
of the credit union financing your auto loan, and press "yes." When the connection is established, you can direct the billing computer
to an account on your smart card and debit that account for the amount of the monthly payment.

The security features of the smart card are equal to that of the ATM, in that you can transfer account numbers and amounts across
phone lines without fear of their being surreptitiously acquired. Also, you would not have to make midnight sojourns to the ATM
anymore, watching your back and the bushes for potential muggers.

One challenge of budgeting today is keeping track of cash expenditures. Even when we remember to ask for a receipt, it often
disappears under the car seat or ends up in the wastebasket. Smart cards can remember every transaction, the amount, and with
whom and when you did business. When the time comes to reconcile the family budget, you could insert your smart card into the
reader attached to your PC and run the budgeting software. Versions of Intuit's Quicken and Microsoft's Money may be developed to
off-load records from smart cards.

Eventually we could all be carrying only one card - the smart card. No more ATM cards, gas cards, video cards, etc. There is enough
memory in the microprocessor of a smart card to hold multiple accounts, enough for each card we currently carry in wallets and
purses. A recent survey conducted by several card issuers found that 84% of the 2,000 people polled wanted a smart card to be an
extension of the ATM card; they don't want another card to carry around.

Less Cash Handling For Merchants

Currently it costs businesses and banks about $60 billion each year to handle cash and coin. Consider that cash gets counted at
least five times between you, the merchant, and the bank. One, you count the money (even if in your own head) that you hand the
clerk. Two, the clerk counts the money as it is put in the till. Three, the store manager counts the money when totaling the day's
receipts. Four, the bank teller counts the money as the merchant makes a deposit. Five, the bank's accountant reconciles the money
at the end of each day. About 60% of the counting falls into the hands of the merchant. Not only is this error prone, but the merchant
could be using that time to cut costs or extend business hours. Smart cards provide the easy accountability of credit and debit cards
with the liquidity of cash.
Counterfeiting is a growing problem for merchants. High-quality color copiers or color laser printers using suitably textured paper can
produce nearly perfect knockoffs of any denomination. Most retail clerks and all bank tellers are trained to look for characteristic flaws
in copies, but in the daily grind, especially during the heat of holiday shopping, people get tired and vigilance falls off. The issuer of
the smart card guarantees the value loaded into the card, so the merchant knows that only "good money" will be transferred to his or
her own card. Likewise, any recipient of value from a merchant knows the money is good.

Merchants could take advantage of smart cards to form alliances to offer promotions and sales. For example, "BestGas" service
stations could team with "Rigby" drug stores and offer a discount to the consumer if both accounts are on the card. At a BestGas
station, the smart-card reader checks for a Rigby account (although it cannot get value from the Rigby account or even determine
how much is in there). Upon detecting the account, the gas station could give you a 10% discount. This alliance gives the consumer
incentive to shop at BestGas and Rigby.

Less Fraud for Banks

Banks could use the enhanced security of smart cards to help reduce the expensive problem of fraud. Visa and most other card
issuers set aside about $1 each year for each credit and debit card they issue to cover fraud loss. Since there are 115 million cards in
the United States and 357 million cards worldwide, that amounts to more than one-quarter of a billion dollars lost to fraud.

Banks could also realize a derived benefit from smart cards - reverse float - sure to rankle those of us adept at "floating" checks.
When you load your smart card from a bank account, the bank adds an equal value to its escrow account. As you spend money,
transferring value from your smart card to the merchant, that value will ultimately be reconciled with your bank. Your bank pays on
demand from the escrow account to keep the system in balance. What happens to the money in the escrow account while the bank
waits for you to empty your smart card? It is invested. Suppose you visit the bank on Monday and load your card with $200. The bank
credits your smart card with $200 and debits your bank account equally. A debit of your bank account means a credit to the bank's
escrow account. If it takes you two weeks to spend all the money on your smart card, the bank has two weeks to invest that unspent
portion of the $200.

Easing the Burden of Government

While the federal government does not directly handle money, except to mint it and dispose of it, it could realize gains in controlling
the economy through improved monitoring of prices, inflation, and the velocity of money. Tax collection could improve as income
taxes may become completely integrated with payment systems. Theoretically, the federal government could stop printing cash and
minting coins.

Federal, state, and local governments could move to more paperless transactions, including the elimination of welfare checks.
Welfare recipients could load their smart card at ATMs, or similarly installed devices at the Health and Human Services Office. Once
the card is loaded, the "welfare account" could be tagged so that money can only be spent at certain locations, limiting opportunities
to misspend the benefits. Medicare, AFDC (Aid to Families with Dependent Children), and tax refunds could all be managed
electronically with smart cards.

Another potential benefit for local authorities is, with appropriate judicial process, working with banks to provide information for
tracking deadbeat parents for back payment of child support.

Are We Ready for Smart Cards?

For all their benefits, smart cards still have shortcomings, and the lion's share of them falls on the consumer and merchant.
Anonymity, usage fees, and acceptability top the list of concerns. One problem is that electronic transactions are invisible and the
content of the information exchanged is unknown to the card holder. Handing cash and coin back and forth and counting it at any
time and in any place has a certain comfort for us. Even though we have learned to adapt to the invisible machinations of electronic
devices, such as the VCR and PC, we still have an inherent need, albeit suppressed, to understand what is happening behind the
scenes.

Another problem is that the consumer may lose the anonymity of cash transactions with smart cards that create a record of each
transaction. It is possible to trace cash through the unique serial numbers on each bill, but it is not practical. One survey found that,
while 26% of those polled thought multiapplication smart cards were an "excellent idea," 70% were concerned about privacy.

A major area of concern is what information is being recorded. In a multiapplication smart card, there is a considerable amount of
information about you - information you would most likely want to keep private, or at least be in control of whom you share it with. If
your smart card is not properly programmed and secured, a merchant could access your health records, driving record, or any other
information on the card.

Other problems arise of a more practical nature: the cost to use the smart card and the need for its widespread acceptance. It took
many years before the debit (ATM) card was accepted at stores and gas stations. For the Mondex smart card test in Swindon,
England, card usage is less than one-tenth of expectations because of the [pounds]1.50 ($3.25) monthly fee - whether the card is
used or not. If you have to pay an annual or per-usage fee to use a smart card, you would want it accepted wherever you go. But
merchants will first have to be convinced that there is value in converting or upgrading existing readers and terminals to work with
smart cards.

Smart-card readers can malfunction, and without human operators the system could decay to the point of being unusable. Broken
ATMs, out of order parking meters, misbehaving vending machines, empty stamp machines, and closed toll gates are a few of the
everyday experiences that make automation synonymous with irritation. If unattended smart-card systems are not robust (no small
feat where the public is concerned), they could be spurned in favor of slower human attendants.

Upfront Costs for Merchants

To establish themselves as smart-card acceptors, merchants will have to replace old equipment with newer smart-card-compliant
terminals. This means more capital investment with an uncertain payback. Also associated with new equipment is the expense of
training employees and the less tangible "cost to operate." In addition, the card reader and associated equipment take up precious
space that could be used to display merchandise. Most merchants have decided they will not move forward with smart-card support
until consumers demand it or it can be proven to increase sales or save money.

Tradeoffs for Banks

Banks face an important decision: Should the smart-card transaction be on-line or off-line? All credit card and debit card transactions
today are on-line. On-line means that the equipment that reads the magnetic strip on the back of your card is connected to a bank or
clearinghouse computer. Some of these connections are permanent, such as those found in grocery stores. Other connections are
"dial-up," which means that every time a card transaction takes place a phone call is made by the equipment to the bank or
clearinghouse. Off-line means that transactions are recorded by the merchant and processed in a batch at the end of the day -
avoiding calls to the bank or clearinghouse with each transaction.

If banks elect the "on-line" method with smart-card transactions, they will face the same problem that Denmark's Danmont system is
experiencing. In the Danmont system, every smart-card transaction is performed on-line - even the purchase of a candy bar. The
bank and clearinghouse computers became overloaded with transactions. Banks were then faced with having to invest in more
communications lines, computers, and software to handle the flood of low-value transactions. The capital equipment to support on-
line transactions runs into the tens of millions of dollars. Similar systems in Portugal and Singapore have faced comparable problems.
This problem is similar in scope to that seen with the emergence of debit cards, although many terminals were already in place to
handle credit cards and subsequently reprogrammed to handle both types of cards. The Danmont system was adapted similarly, by
improvements in infrastructure and defined usage; the net result is that the system is now well accepted and expanding.

But off-line transactions are anathema to banks. The strict rule of banking is to account for every penny going into or out of the bank.
The other argument against off-line transactions relates to security. If someone managed to counterfeit a smart card, the bank would
not be able to identify the perpetrator of the fraud after the transaction was completed at the merchant site. An excessive number of
claims against the bank's escrow account would signal that a fraud was being committed, but the bank would have no means of
determining who did it or when.

Looking toward Tomorrow

The four major agents influencing the economy - consumers, merchants, banks, and government - each must see valuable benefits if
smart cards are to succeed. Consumers want the convenience and anonymity of cash with the record-keeping capability of checks.
Merchants want good record keeping, lower costs, and widespread acceptance. Banks want accounts to balance, guaranteed
integrity, and the opportunity to make a profit. Government wants to continue to collect taxes, improve its oversight of the economy,
and reduce counterfeiting. All the foregoing elements must come together in a cooperative system that also addresses potential
pitfalls before smart cards become widespread in the emerging electronic economy.

What does the future hold? Growing acceptance of smart cards worldwide. The European market is growing, having been initiated to
address high telecommunications costs, fraud, or poor infrastructure. We can expect to see the rest of the major economic powers
follow suit in the next two decades, and some developing countries answering telecommunications infrastructure challenges.

While anonymity is debated, there are systems that can ensure it, and the potential gain from combining a plethora of existing cards
is great. Credit cards will continue to hold the lead for purchasing big-ticket items (i.e., more than $100 per transaction), but look for
smart cards to start breaking ground in dedicated systems, such as transportation. With the exponential increase in microprocessor
power, card security will rival or surpass that of ATMs, thus assuring us of complete control over access to the information smart
cards contain. All the necessary technology exists today, and, like the advent of the internal combustion engine, it requires only our
creative imagination to put it to good use.

About the Author

Doug Manchester is a senior member of the technical staff of VeriFone, Inc., a leading international supplier of products and services
for transaction automation. He also serves on the American National Standards Institute committee for defining international smart-
card standards. His mailing address is 12830 Earhart Avenue, Auburn, California 95602. Telephone 916/889-4928; fax
916/889-4903; e-mail leigh@well.com.

The opinions and conclusions expressed herein are those of the author and do not necessarily reflect those of VeriFone or its
customers or alliances.

Copyright: COPYRIGHT 1997 World Future Society

http://www.wfs.org/wfs
Source Citation (MLA 8th Edition)
Manchester, Doug. "Smart cards: key to cashless economy?" The Futurist, Jan.-Feb. 1997, p. 29+. Gale General OneFile,
https://link.gale.com/apps/doc/A19129330/GPS?u=lyceumph&sid=GPS&xid=d437c29a. Accessed 12 Feb. 2020.
Gale Document Number: GALE|A19129330