The Cashless Society
Sydney Morning Herald
Tuesday September 3, 1996
Are banks using smart cards to put a charge on cash?
IMAGINE stashing a piece of plastic under your mattress for a rainy day. Ridiculous. Cash, however, is another matter. Cash has been king since time immemorial. It is simple, free and universally acceptable.
But smart-card operators want to change that with their chip technology. How likely are they to succeed? And will they be able to persuade us to pay for something we've always got for free?
Cash is popular because it offers a no-cost, uncomplicated and anonymous form of payment. Smart cards, with their clever microchips, leave an audit trail detailing transactions - although financial institutions say credit and debit cards do this too.
A smart card has a pre-paid stored value which can be used anywhere (unlike a phone card). Each time you use it, a micro-chip in the card records the transaction and calculates the remaining balance.
Because it is "smart" it can also store foreign currency or track purchases for loyalty programs. Consumers will ultimately be able to replenish their cards via a phone or personal computer.
Plastic cards already dominate our lives. We use credit and charge cards to pay for big-ticket items and EFTPOS to pay for medium-sized purchases. In just over a decade, the use of automatic teller machines and EFTPOS has climbed from virtually zero to accounting for more than half of all cash transactions.
These days, the only time consumers get to hold real cash is at the "nickel and dime" end of the wallet. Once that is captured by the new technology, conventional currency as a general medium of transaction will be changed forever.
Smart cards are still at trial stage. Major players such as Visa and MasterCard are running pilots to test consumer acceptance. Depending on whom you speak to, they are either a terrific success or rather disappointing.
Mondex, supported by the Big Four banks which have an interest in it, will trial cards next year. If the card operators succeed in convincing us of their usefulness, they will have struck gold. Visa estimates that of the $10.8 trillion in cash transactions made each year around the world, $2.4 trillion or 22 per cent involve purchases of less than $13. Smart cards target purchases under $20.
However, consumers know from past experience that when plastic is offered for free, fees can't be far behind. Credit cards, once free, now cost about $22 a year (on top of the 2.5 to 5 per cent commission paid by merchants). ATMs and EFTPOS followed the same pattern. Despite giving the banks huge savings, consumers pay anything from 25 cents for EFTPOS to $1 per ATM transaction.
Elsewhere in the world, EFTPOS remains mostly free to consumers. Merchants, who gain most from it, pay the costs.
But when EFTPOS was launched here, banks did the opposite with some of the largest retailers. The banks paid them, to entice them on board, then passed the cost onto the consumer.
"It's important we don't make the same mistake with smart cards," says John Hall, general manager of retail banking at Credit Union Services Corporation. "Financial institutions should concentrate on putting smart-card terminals in merchants who derive the greatest benefit from them and ensure that they pay a fee for the service. That fee should be shared by the financial institution that issued the terminal and the institution that issued the card, as both need to recover their costs."
Hall says that in Denmark, disposable smart cards are sold to consumers fee-free. Danmont, the company that operates the scheme (and which is owned by the Danish banks), charges the merchants 1 per cent of the transaction value. Additional revenue is raised through selling advertising space on the cards and from collectors, who contribute a third of income.
While banks and card operators are reluctant to discuss fees at this stage, they acknowledge "it's the cheapest technology of all". The cards are relatively cheap to produce. And because the smart card is pre-funded, it doesn't require expensive on-line bank verifications at point of sale.
Andre Sekulic, senior vice-president of MasterCard, says it is up to the banks to decide fee structures.
"The cost to the consumer is something for the banks to determine," he says. "Each will want to offer different features and you'll have different fees associated with it."
Richard Davies, chief manager of card services at the Commonwealth Bank, says: "There certainly will be a merchant's fee, but it will be lower than the current credit card fee." Beyond that, he says, the banks have yet to establish what consumers prefer from the trials.
"It can get terribly complicated if you let the technology run away with you, but it will be an evolutionary process rather than a revolution. You will have different levels of service and different packages. The closest analogy I have is what is happening to cable TV. They've spent billions rolling it out, but to make it profitable you need to supplement it with additional services other than TV."
Various cards are being tested. Visa has a disposable, stand-alone card that can be topped up. MasterCard links its reloadable card to debit and credit cards. Mondex card-holders can transfer value from card to card using a wallet-sized terminal.
All three can operate internationally. Only the disposable cards are truly anonymous.
A National Australia Bank spokesman, Haydn Park, says there will have to be a charge mechanism but it won't be known for a couple of years: "Whether it's disposable or refillable, someone has to pay towards the cost of the system. If people see value in it they will be willing to contribute to the cost of it."
Park suggests one possibility is to charge an annual card fee to the consumer, with the "merchant contributing something".
Until now, banks have borne the expense of supplying cash free to consumers, but he believes those days are numbered.
"Consumers are used to a mechanism of exchange they have never paid for; they've had all the manufacturing, transportation and security paid for by someone else," he says. "When you ask for $500 you get $500 back - you aren't charged 1 per cent. But changes are occurring. Banks can no longer afford to subsidise that business through loans and deposits."
ANZ is participating in both trials. The bank has signed up the Gold Coast theme parks where Visa's disposable cards are "selling like hot cakes".
Charles Carbonaro, chief general manager operations and payments, says his statistics indicate MasterCard's trials have been less successful. "That may be because of the location, not because of the actual product. I would have thought an integrated product would have done better but the figures don't show that to me."
(Gauging the success of the trials is difficult. MasterCard's Sekulic says trials are going "very well, contrary to the opinion of others".)
Carbonaro believes everyone will benefit. For banks and merchants, cash-handling costs will be reduced, and consumers will have a quick, safe method of payment. "Every party has to pay for it. At the end of the day we are all benefiting economically from it. It's the beginning of the end of cash as we know it today."
Consumer concerns include privacy, cost, the ability to verify balances, who benefits from the float and what happens with a lost or malfunctioning card. What about compatibility? As yet, there is no industry standard.
"In the initial stages you will have to be sure that the card can be used in the places you want it to be used in," says Peter Kell, senior policy officer at the Australian Consumers' Association.
He would also like to see sensible privacy legislation. "The more complex the card, the greater the potential for privacy problems to arise. Smart cards are smart by virtue of the fact that they can carry a lot more information about you. The onus is on the institutions to get it right. It all needs to be resolved before the consumer will have confidence in the technology."
Nor does the consumer lobby want to see fees brought in by stealth. "We don't want to see this particular payment system going down the same track as EFTPOS and ATMs - marketed as free, or close to free, at first, and then see the charges creep up," Kell adds.
He says consumers have not expressed much interest in the trials. "(Cash) is still far and away the most convenient form of payment. I think smart cards will find a niche, given the way Australians have taken to new payments technology - it will become part of their payment tool kit - but I think at this stage there is little smart cards can do that you can't do more easily and simply with cash.
"It's up to the provider to demonstrate that smart cards are more useful than cash. They really have to offer as much as cash does and a bit more."
SMART OPTIONS THAT FIT IN YOUR POCKET
A Smart card is like a personal computer on a piece of plastic. It can be loaded and reloaded with value through an automatic teller machine or EFTPOS and used wherever merchants have the equipment.
Cards can be disposable - discarded after use and leaving no record or transaction. Or they can be combined with credit or debit cards and therefore capable of leaving an audit trail. With this option, consumer can check the accuracy of transactions against a monthly statement.
While some operators will allow cardholders to cancel lost or stolen cards and recover value, others will not. The main players have cards which can operate internationally and carry multi-currency programs.
Several trials are being conducted:
* MasterCard is running a trial in Canberra. The card is linked with a credit or debit card and is reloadable.
* Visa is testing a disposable card on the Gold Coast and is about to test a reloadable version. The Visa smart card can be linked to a debit or credit card. The former is being tested with the co-operation of Cuscal, in Newcastle.
* Mondex is a UK-based scheme operator, owned by two British banks. The Big Four have each taken an equal stake in Mondex Australia and plan to test the card next year. Mondex has a unique system which mimics cash more closely. When value is transferred to a Mondex card it exists nowhere but on the card and can be transferred anonymously from cardholder to cardholder through an "electric wallet".
* On a smaller scale, Transcard is a reloadable card being tested in Sydney's west. Developed to be used around transport - taxis, buses, vending machines ad shops - it is similar to a prepaid bus ticket. Quicklink is running a similar pilot in Newcastle.
© 1996 Sydney Morning Herald
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