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. --- Dr.Dimitri Vulis KOTM Brighton Beach Boardwalk BBS, Forest Hills, N.Y.: +1-718-261-2013, 14.4Kbps