NPR's Morning Edition: Monday, October 14, 1996
'Smart Cards' Becoming Next Generation of Debit Cards
BOB EDWARDS, Host: This is Morning Edition; I'm Bob Edwards.
The next generation of plastic money is ready, with banks and credit card
issuers preparing to introduce smart cards to consumers. Smart cards use new
technology to take debit and credit cards a step further, and could replace
many of the transactions that still utilize cash.
However, Ancel Martinez of member station KQED in San Francisco, reports that
smart cards are not catching on quickly.
ANCEL MARTINEZ, Reporter: You may not have noticed it but smart cards have
been around for some time, mostly on a trial basis in various cities. VISA
tried to make them popular during the Summer Olympic Games in Atlanta. Vendors
and merchants accepted the cards, which contain a computer chip instead of the
magnetic strip. Smart cards replace the need of cash at places, from fast-food
joints to service stations.
Tom Sack [sp] at the Veri-Phone Company [sp], oversaw the installation of
hundreds of smart card terminals in Atlanta. TOM SACK, Veri-Phone Company:
What we were interested in doing was raising consumer awareness of an
alternate payment type, so what we're doing with stored value cards in general
is to move some of the coin and bank note traffic into an automated form.
ANCEL MARTINEZ: Smart cards keep track of individual bank balances, actually
storing money on their microprocessors. They're faster to use than ordinary
credit or debit cards. Sack says smart cards are better than regular cards,
which must be constantly checked for authenticity and credit limit.
TOM SACK: We're able to set up a session between the card and the terminal,
where you really have two computers talking to each other, and what they can
do is they can exchange secrets to prove each other's identity, for example.
So what this allows us to do is to actually conduct the transaction without
making the telephone call, so that we can do a transaction very inexpensively
because we have more processing power in the card itself.
ANCEL MARTINEZ: Designers and manufacturers hope to have as broad of
application as possible for smart cards. State agencies are considering the
use of smart cards for commuters to pay turnpike tolls, and as a way for
people on welfare to receive government assistance. Another target is the
booming cellular phone industry. Telecommunication companies suffer tens of
millions of dollars in losses from rampant theft, but if customers' phones use
smart cards, so key information is not embedded in the telephone itself, the
chance of fraud is greatly reduced, since the phone won't work unless the
owner inserts a smart card.
But the card's value as a security device as come under question. Belcor
Laboratories [sp] in New Jersey recently announced cryptologists discovered
hidden problems on the smart cards, which have been advertised as
tamper-proof. Bill Barr [sp] with Belcor says researchers discovered two
things.
BILL BARR, Belcor Laboratories: One, we've discovered how to manipulate a
piece of computing technology and force it to make an error; and second, we've
discovered that if it does make that error, then we can, by using our
sophisticated mathematics, figure out how to extract the key out of the
computing device, the secret.
ANCEL MARTINEZ: If a sophisticated criminal can make a copy of a legitimate
card, or if smart cards can be manipulated around the notoriously feeble
security systems of the Internet, the technology may not be any good. Some
experts, however, say there's no reason for panic. They say the Belcor study
will not slow the eventual nationwide acceptance of smart cards.
According to analyst Karen Apple [sp] at Forester Research [sp] in Cambridge,
Massachusetts, banks remain steadfast in the belief that smart cards can, and
will, reduce fraud.
KAREN APPLE, Analyst, Forester Research: The credit card industry suffers from
about a billion dollars in fraud every year as it is. I don't think it can get
much worse than that. Smart cards do provide a greater level of security than
the systems that are in place today.
ANCEL MARTINEZ: Smart cards may be a good way for banks, credit card companies
and merchants, to cut costs and save money, but smart cards are not in high
demand with the people who matter most, consumers. Again, Karen Apple-
KAREN APPLE: You have sort of a chicken-and-the-egg problem where nobody wants
to be the first to make a move. Consumers don't want to embrace smart cards
until they're accepted more widely, and merchants don't want to foot the bill
to make smart cards more widely available, or more widely accepted.
ANCEL MARTINEZ: Facing such a dilemma, retail groups, banks, financial service
companies, have formed a coalition to negotiate new technical protocols for
smart cards, as well as a means to finance the new technology. Called Smart
Card Forum, it's a who's who list of American business. Citibank,
Hewlett-Packard, American Express and Motorola are but a few, and there's a
Microsoft representative. Software companies are keen on smart cards because
they forecast that the electronic cash will set a new standard for commerce on
the Internet
For National Public Radio, I'm Ancel Martinez in San Francisco.
Associated Press: Tuesday, October 15, 1996
Online Banking: Cutting Edge or Over The Edge?
By PATRICIA LAMIELL
A future television commercial, brought to you by your bank:
Dawn creeps through the windows of a house. Logging onto his personal
computer, a young executive instructs his bank to pay bills, checks on his
investments and completes an online car loan application.
His wife calls. Away on a business trip, she has just transferred cash, via a
laptop computer, from the family's savings to their checking account.
His son charges in, late for school and bellowing about lunch money. Dad grabs
the boy's smart card - a plastic credit card look-alike embedded with a
computer chip - and swipes it through a card reader in his PC to download
electronic cash from his bank account onto the card.
Banks hope this scenario becomes reality in the not-too-distant future.
They're betting that online innovations will transform the way consumers
complete most financial transactions, from buying a cup of coffee to investing
for retirement.
About 200, or 1 percent, of financial institutions in North America currently
offer online banking, but because most large banks offer it, it is available
to 60 percent of consumer banking customers, said Jim Bruene, editor of the
OnLine Banking Report, an industry newsletter based in Seattle.
If the industry has its way, every household will be banking soon from a home
computer. "We see the numbers of online banking customers exploding from prior
years," enthuses Michael Papantoniou, vice president for electronic commerce
at Chase Manhattan Corp.
But it's not certain that consumers will take to the new technology in enough
numbers to justify the expense to banks. Dana Massie, an online client of
Wells Fargo Bank, is director of technical research for Creative Technology
Ltd., a multi-media company, and is probably as computer-savvy as banking
customers come.
But, Massie said, "I don't have a lot of patience for complicated stuff at
home. When computers are as reliable and easy to use as televisions, then they
will take off, because they're a lot more fun. But computers have to stop
crashing, they have to turn on instantly - and computers are loud."
Financial companies believe online banking will lower transaction costs and
give them an edge over competitors. They've taken studies showing that
customers like online banking because it saves them time, and that it appeals
to merchants because it saves on billing and processing costs.
But the notion of winging theoretical money through cyberspace still sends
many consumers into a panic. And it prompts questions about security and
privacy. Many people still want to handle cash and speak face-to-face with
their bankers.
A closer look at online banking:
HOW DID WE GET HERE?
Online banking actually has been around for years. "It may be one of those
overnight success stories that took 15 years to develop," quips Bob Schettino,
a spokesman for Intuit Corp., which makes the Quicken home finance software.
The huge growth in consumer purchases of PCs over the past decade has fed the
expansion of online banking. By 1995, more than 30 million households in the
United States had home computers. More than a third used some type of personal
finance software.
Intuit and other software makers figured out how users of their home finance
software could communicate via PC and modem with their banks. And the Internet
became vastly more popular and more secure, leading to the creation in October
1995 of Security First Network Bank, the first Internet-only bank.
Meanwhile, significant innovations in the smart card made it possible to carry
electronic cash and perform financial transactions from a computer or
telephone. The smart card - even more than the magnetic stripe card, which
made automatic teller machines and debit cards possible - turned on its ear
the notion that banking customers must visit a bank.
Financial institutions began using online banking to attract and keep
customers. PC owners, who as a group are young, well educated and affluent,
are prize customers indeed.
A few large banks, including Chase Manhattan Corp., Citibank, Bank of America
and Wells Fargo, developed or acquired online banking systems. Other financial
firms formed alliances with technology companies - Visa International has
teamed with Microsoft Corp., while 15 banks formed a consortium with IBM.
But online banking is still nascent. Of the 10 million households that use
Intuit software products, only about 350,000 or 3.5 percent, have signed up
for online banking, Intuit said. The American Bankers Association said about 1
percent of transactions in 1995 were completed online.
ONLINE BANKING AND YOU
What does this trend mean for the banking customer? Online banking shortens
the amount of time consumers spends on finances, and allows them to work on
them any time of the day or night. No more racing to the bank Friday afternoon
to deposit a paycheck - Chase said 40 percent of its online banking is done on
the weekend.
Some consumers have been leery of doing banking or other personal business on
the Internet, which works like a huge electronic party line, for fear someone
could steal private information. But developers of online banking technology
say new scrambling and encryption techniques have made Internet transactions
safer.
Indeed, researchers are concentrating on new applications that allow banking
and commerce directly on the Internet, as well as through online service
providers like America Online and CompuServe. They say online commerce is
safer than giving a credit card number out over the telephone.
A big stumbling block to the growth of online banking is that most vendors
such as department stores and utilities don't accept electronic payments.
Right now, this is a chicken-and-egg problem for banks - vendors are reluctant
to invest in technology that their customers won't use. Consumers are leery of
investing in technology that vendors don't accept. John Dickinson, a
self-professed computer geek and freelance magazine editor, has been doing
online banking for 12 years and pays 95 percent of his personal and business
bills that way. But he still gets into scrapes with vendors.
He said he can't get his phone company, for example, to consolidate the eight
paper bills that it sends each month for different accounts at his San
Francisco home and office.
And Pacific Gas & Electric Corp. was taking two weeks to process his payments,
and then started dunning him for being late. Three months ago, he "got really
bored with calling them up all the time, so I just threw up my hands" and got
the utility company to automatically debit his checking account each month.
WHY THE BANKS WANT IT
Financial institutions are in a life-or-death race with technology and
telecommunications companies to provide home banking services.
Electric utilities, telephone and cable companies already have lines into
homes that can transmit financial information and are trying to develop new
services. If customers can transfer money and get loans via a technology or
communications company that already has lines into their homes, why would they
need a bank?
So banks must reassert control of the banking business, or cede it to
non-financial companies. But regaining control is tricky indeed. Banks have
invested billions of dollars in technology - such as machines to read magnetic
stripes on cards - which is fast becoming obsolete. They have also built, at
tremendous expense, a lavish branch system that, while shrinking, is expensive
to maintain.
Banks have to make good on these investments before they charge into new
technologies that may themselves be quickly obsolete. They also must stay
innovative enough to keep their increasingly computer-adventurous customers.
The task is somewhat like catching a moving bus.
"By the time people get literate with PCs," said Frank Woosley, director of
financial services consulting for Deloitte & Touche in Dallas, "the smart
banks are going to take the stuff that would normally be done on a PC and
eliminate it altogether," like drafting checks, reconciling statements and
moving money between accounts.
If they are to continue to be the place where people deposit and borrow money,
banks must devise cost-effective ways to turn the new technology into programs
customers and merchants will use.
That is a tall order, even for banking powerhouses. "But if we're not doing
that," Woosley said, "we're not going to be in business much longer."
Reuters: Tuesday, October 15, 1996
Deutsche Bank Gears Up For Virtual Shopping Test
By Catherine O'Mahony
FRANKFURT-- German shoppers weary of the long queues and curt service that
typify the High Street here may soon have a more relaxing option -- virtual
shopping courtesy of the biggest bank.
Deutsche Bank AG is gearing up to test "Ecash" -- a system based around
electronic "coins" which allow the user to buy goods and services over the
Internet -- in just the third initiative of its kind worldwide.
"Cyber money" is being hyped by computer boffins as the cash of the 21st
century, although the initiators of Deutsche Bank's project are somewhat
sceptical of the hype.
"You can't expect people to change their habits overnight. This will start
with the technology freaks who go along with everything," Christof Blum, head
of Deutsche Bank's technological developments team, told Reuters.
But Blum is confident that specific services, especially media-related
products such as newspapers, magazine articles and other information, can sell
well on the Net.
Eventually, he said, "This will be pretty big."
Blum and his team are working on a six-month pilot programme expected to start
by January 1997, giving a selected group of Germans their first taste of a
virtual shopping spree, albeit with a limited choice of products.
Some 1,000 bank customers and a group of around 30 service providers, mainly
publishers, will take part.
Using software supplied by the bank, and developed by the specialist Dutch
firm Digicash NV, customers will be able to ask Deutsche Bank via their PC to
transfer funds from their regular bank account into an interim "Ecash" deposit
account.
The required amount of "electronic coins" -- denominated in deutsche marks --
can then be stored on the customer's PC hard disk, where they will be
displayed in the form of a purse icon. Payment is simple: Internet users will
be able to call up prices on screen for goods on offer and transfer the right
amount of Ecash to the vendor by clicking on the purse icon.
With even credit card acceptance still strikingly limited here, the day
Germans switch on their PCs instead of their car engines for their weekly
shopping trip is some way off. But Deutsche Bank says it wants to be ahead of
the game when it arrives.
Established in the late 19th century, the bank has been defying its stuffy
image of late by making strong efforts to modernise its products, especially
in retail banking.
Part of its modern face is a six-month old "communications centre" at its main
office for technological developments in suburban Frankfurt -- an open-plan
space where staff can surf the Internet and test out prototype equipment.
Blum, whose team is one of several at Deutsche Bank working on a variety of
innovative products, says it will decide whether or not to proceed fully with
the Net cash project on the basis of its six-month test.
If so, the bank would join a tiny group of financial institutions involved
with cybermoney -- the world pioneer is Mark Twain Bank of the U.S., which
introduced digital dollars last year. Finland's Merita Bank is also running a
test.
Deutsche Bank says it is aware of the reservations many hold about the
security of Internet cash but Blum says the Ecash software is completely
secure.
As in a regular ATM withdrawal, customers have to identify themselves to the
bank to get access to the electronic cash and the "coins" are issued with code
numbers similar to the serial numbers on regular banknotes.
Nonetheless, Deutsche Bank has involved the Bundesbank in its discussions on
the Internet project from the start.
The guardian of Germany's famously solid deutsche mark is keeping a watchful
eye on cashless payments in general amid concern that electronic commerce
could be open to abuse and that virtual money could eventually disturb world
cash flows.
The bank has also been flooded with queries on its Internet cash plans from as
far away as Japan.
Its rivals on the home market, several of whom have set up banking services on
the Internet in recent months, are also taking a keen interest, but none have
yet taken the plunge with their own initiative.
American Banker: Thursday, October 17, 1996
Amex Testing Its First Smart Card, with American Airlines
By VALERIE BLOCK
American Express Co. will join the smart card parade with a test of electronic
ticketing for American Airlines passengers.
After standing on the sidelines while the banking industry announced pilots
around the globe and the bank card associations created an industry standard,
the charge card giant is finally entering the ring.
Using technology developed by IBM Corp., the program lets passengers insert a
corporate charge card with a computer chip into a reader at American Airlines
departure gates. They would receive a boarding pass, without presenting a
paper ticket.
The chip will contain the passenger's identification and frequent-flier
number, which will be matched with ticketing information in American Airlines'
data base. The cards, with magnetic stripes, will also function as corporate
cards that may be used at any location that accepts American Express.
Most major airlines, including Continental, Delta, Northwest, and United, are
testing electronic ticketing. Lufthansa, which has such a smart card program
in Europe, may be the only carrier with one in place.
Initially the pilot program will be modest, with just "hundreds" of corporate
charge cards combining magnetic stripes with chips being issued to American
Express and IBM employees. But the plans are ambitious.
Bill Hohle, smart card technology leader, described American Express' venture
as "the first step to a comprehensive multiapplication travel and
entertainment product."
He envisions that cardholders could book travel, purchase airline tickets,
expedite car rentals and hotel check-in, and electronically insert travel
information into an expense report for reconciliation.
The pilot is to begin by mid-December at 21 U.S. airports, including ones in
New York, Los Angeles, Dallas/Fort Worth, and Chicago. American Express
provides corporate cards for IBM in the United States.
Mr. Hohle said American Express also intends to test an electronic purse
application for smaller purchases.
Rumors have it that American Express will purchase Proton, a stored value
smart card program designed by Banksys of Belgium. But Mr. Hohle said it's
"too early to discuss" those plans. Proton is in its pilot phase in several
countries in Europe.
It might seem odd that American Airlines is American Express' new partner,
given that American Express issues the cobranded Delta Sky Miles Optima Card,
while Citicorp issues the American AAdvantage card. But the charge card firm
gained a technological break from the deal.
American Airlines recently introduced a ticketless travel program, called
AAccess, that uses magnetic stripe cards. To accommodate the program, the
airline installed enhanced gate readers that can also read chip cards.
Piggybacking on that technology, American Express will avoid the costs of
installing and wiring card readers. It will also alleviate the onerous job of
persuading merchants to accept the cards.
Visa and its bank partners were forced to do that for the Visa Cash
experiment, introduced in Atlanta during the Summer Olympics. Other bank smart
card tests, such as the MasterCard program in Canberra, Australia, have been
stymied by merchant resistance.
"I see it as big win" for American Express, said James Accomando, a Fairfield
Conn.-based consultant. "Now it gets a relationship with a dominant carrier in
the U.S. that it didn't have before."
Jerome Svigals, a card industry consultant in Redwood City, Calif., called the
move a "willingness of American Express to explore new partnerships." He noted
that all the card organizations are searching for "the best way to move
forward" with smart cards.
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Dr.Dimitri Vulis KOTM
Brighton Beach Boardwalk BBS, Forest Hills, N.Y.: +1-718-261-2013, 14.4Kbps
