Technological Glitches Trip Up New York Debut of Plastic Cash By PAUL BECKETT Staff Reporter of THE WALL STREET JOURNAL Smart cards invaded New York last year, when four of consumer banking's most sophisticated players began one of the biggest real-world trials of plastic cash. But right from the start, the closely watched effort slipped on an unforeseen banana peel: technology. In a test with far-reaching implications, Chase Manhattan Corp., Citicorp --now part of Citigroup Inc. -- MasterCard International and Visa USA co-sponsored the pilot program, which began last October. They distributed about 96,000 smart cards embedded with computer chips to residents of Manhattan's Upper West Side. Then they watched to see how willing people were to use the cards instead of cash. The answer is, not very, according to merchants and consumers. A big reason was the support network of hardware was so riddled with technical and logistical headaches that it often made using the smart cards a hassle instead of a breeze. Usage has dwindled to a trickle. More than a third of the 600 merchants who signed up for the pilot either have quit or were eliminated from the test by the sponsors. Many of the ones who remain are fed up. Smart cards figure in an antitrust lawsuit the Justice Department filed against Visa and MasterCard Wednesday. The regulators accuse the bank-controlled credit-card networks of holding back on efforts to develop new products, including smart cards. Visa and MasterCard denied the charges and vowed to defend themselves. The smart cards in the Manhattan test work like the long-distance phone cards that vending machines in supermarkets sell. The cards -- either a Visa Cash card issued by Citigroup's Citibank unit, or a MasterCard Mondex card issued by Chase -- are filled with cash from a person's bank account. Users draw on the card's stored cash as they pay for merchandise; store clerks swipe it through a special terminal at the point of purchase. Users can refill the card with cash at a bank or automated teller machine. For the test, there are no annual or transaction fees for customers or merchants. Tough Customers The sponsors chose as their guinea pigs the Manhattanites who live in the swath of real estate between Central Park and the Hudson River, an eclectic stew of millionaires, welfare families, and everyone in between. Many of these tough customers quickly found smart cards were actually pretty dumb. For a start, they weren't accepted in taxis, buses, and subways. There also is a harder-to-explain psychological resistance to the smart cards. "It seems rather un-American to me," says Greg Knight, who lives on the Upper West Side and works at NYCD Compact Disks. The store participates in the smart-card program but doesn't record many transactions. Mr. Knight says he has a smart card but doesn't use it. A busy Duane Reade drugstore on Amsterdam Avenue should have been a good testing ground, because most of what it sells is low-priced. But the smart-card scanners installed at the checkout break down two or three times a month, says store manager Sammy Austin. After calling the program's "help desk," Mr. Austin says, he has waited as long as six days for a repairman, plus two more days for replacement machines. "If they could improve the system, I think plenty of customers would use it," Mr. Austin says. "But in a city like New York, where it's hustle and bustle, everybody wants to be treated one-two-three, and if you can't accommodate your customers, they're just going to forget about it. It turns you off." Sponsors say one reason for the high drop-off rate among merchants is that there was never any screening: The program was open to any merchant who wanted to join. The sponsors themselves later culled out merchants who were recording few smart-card transactions. Few Purchases Zabar's, an always-crowded gourmet food store on Broadway, had its share of technological problems early in the program. When calling the help desk didn't help, the store bowed out of the experiment for several weeks, says Zabar's manager David Tait. The store has since returned, and things have gone more smoothly. Still, it rings up only 25 smart-card purchases a day, Mr. Tait says. Many of the payment terminals that malfunctioned were made by Hewlett-Packard Co.'s VeriFone unit, the biggest of the pilot program's three hardware suppliers. Machines made by the other two -- Hypercom Corp., of Phoenix, and IVI Ingenico Inc., a Canadian-French joint venture -- had early technical problems, too, the sponsors say, but on a smaller scale. VeriFone spokesman Dan Toporek acknowledges the glitches. "There were instances where the machines weren't installed or configured properly," he says. Still, he says Verifone regards the terminals as a success. Nick Massimiano, vice president at Chase Manhattan, says the sponsors moved fast to address the delays in service. A software adjustment fixed many of the problems with the Verifone terminals, he says. Foot patrols of repair technicians check in with merchants to help trouble-shoot. Fairway, a bustling supermarket on Broadway, stopped taking smart cards after just a few weeks. Employees there said it was a hassle to process transactions on the smart-card terminal, which is separate from both the cash register and the credit-card machine. Other merchants complain about having to reconcile their terminals with the smart cards' central computer at the end of the day, so the smart-card purchases will land in their bank accounts. For this task, the sponsors had presented retailers with various options, but some employees never got the hang of the task. So at many of the stores, it became a bothersome after-hours chore for the boss. Mr. Massimiano says adjustments in the modem timing of the terminals has made it easier for stores to settle accounts at the end of the day. But the real issue here is training, not technology, he says. The sponsors issued desktop guides for making the fund transfers. The roaming foot patrols also provide training assistance, he says. 'A Less Positive Experience' "Lots of little things, when you add them up, can create a less than a positive experience," concedes Ron Braco, senior vice president and director of electronic commerce for Chase Manhattan's consumer-banking division. Still, the program has yielded some victories, he says. For the first time in any test program, the Visa and MasterCard smart cards were accepted on the same terminals. Lessons learned suggest the four partners will shy away from broad efforts to blanket an entire neighborhood, focusing instead on specific retail niches in which smart cards are especially useful. "I would say the time for experimentation is probably passed now," says Richard Phillimore, senior vice president of MasterCard's chip-business group. "This really points the direction toward rolling out not necessarily by geography but by merchant sector." One such sector is small-ticket purchases -- launderettes and newsstands, for example. In the latest chapter of the Upper West Side test, smart cards have been introduced in basement laundry rooms in a few of the neighborhood's apartment buildings. So far, the backers say, they have been a roaring success: Smart card users don't need piles of quarters any more. Chase says on average 25% of the laundry revenue at the participating buildings comes from smart cards, and in some locations approaches 40%. "Once the card generates some excitement, people won't care that Duane Reade had a problem at some point in time," says Chase spokesman Kenneth Herz. Adds Judy Darr, director of the smart card program at Citibank, "Our commitment to smart cards remains strong." _________________________________________________________ DO YOU YAHOO!? Get your free @yahoo.com address at http://mail.yahoo.com