The residents of New York’s swanky Upper West Side have thumbed their noses at the cashless society. A scheme to replace cash transactions with plastic cards electronically charged with cash to pay for low-cost items such as newspapers, cigarettes and parking meters, has just collapsed.
The pilot scheme, operated jointly by Chase Manhattan Bank and Citibank using MasterCard and Visa cards, is to be axed in December, just 18 months into the trial.
Nearly 100,000 cards, which could be used at 600 merchants, were issued. But, of the $2.5m (1.5m) loaded onto the cards, only $1m (600,000) was used. Retailers complained that swiping the cards was a cumbersome process prone to breakdowns and cardholders said that not enough outlets were available to make carrying the cards worthwhile. They tended to use them at grocery shops, which already take debit and credit cards.
The trial is a foretaste of a brave new world envisaged by the banks where credit and debit cards containing silicon chips can perform a multitude of tasks, such as transport passes, storing cash electronically, carrying loyalty schemes and being used to pay for commerce on the Internet and through digital television. In the UK, this brave new world is just a matter of months away.
The process of introducing smart cards into the UK starts in earnest next year, when the banks will replace existing debit and credit cards which use magnetic stripes with smart cards containing silicon chips. The UK will be the first country in the world to move comprehensively to smart cards. It will be an expensive exercise – while magnetic strip cards cost a few pence each, smart cards can cost up to 3.
The cost of replacing the 104 million magnetic strip cards with smart cards and upgrading 530,000 retail terminals and 23,200 cash dispensers could amount to 1bn. The plans have worried retailers which believe that they will be forced to carry the burden of the costs. As a result, they have threatened to boycott the new cards.
But the banks insist that chip cards are necessary to combat card counterfeiting, and that they will pave the way for the introduction of the new services that chip technology offers. The banks say card counterfeiting cost them some 20m last year, though this is a small proportion of the cost of introducing chip cards. But if the experience of New York’s Upper West Side is anything to go by, consumers do not see the benefits of the range of services that smart cards offer.
The New York pilot drew together the two major rivals in the world of electronic cash, Mondex International – run by Midland Bank and NatWest – and Visa Cash, part of the Visa consortium. Its failure has seriously set back the bankers’ aim of eradicating cash transactions and has raised questions about the viability of smart cards. But it has not deterred the banks from pouring millions of pounds into further pilot schemes to introduce cash payment by plastic, or from rushing headlong into the smart card technology which is needed to make such schemes work.
This week, Visa Cash launches a new trial electronic cash scheme in Ennis, Ireland, which is an extension of an existing scheme operating in Leeds. Whether this goes the way of the New York trial will be a measure of how effective the banks’ move to stamp out cash and introduce smart cards will be.
So far the signs are not good. Many test schemes have had poor results. A trial in Swindon by
Mondex has been described by a spokesman as “not overwhelmingly successful”.
Richard Parsons of marketing communications agency Gadea explains his view of the failure of the New York experiment: “America is rather anti-smart card. It is a very European technology. There has been no really effective marketing to consumers – it has been mainly to people in the industry. But the reality is that it is a powerful proposition to tell consumers that they can dial and interrogate their bank account, download cash onto their card and transfer it around the world.”
The banks’ motivation for trying to eradicate cash is clear. A Mondex spokesman estimates that it costs UK banks and retailers up to 5bn a year to handle cash transactions, with all that entails – shifting cash around the country, processing it, filling teller machines and banking cash from retailers.
But observers believe that Mondex and Visa are trying to goad retailers and consumers into accepting the system with no visible benefit for anyone but the banks. “At the moment, the merchants are a big barrier, though the customers are more open-minded. The retailers ask ‘what’s in it for me?’ Here is a way for the banks to get out of cash handling,” says John Reeve, a partner at Deloitte Consulting.
Mondex International head of corporate affairs Gerry Hopkinson says: “Electronic cash is a product for a platform that has not yet been introduced. Our business is linked to smart cards and the convergence of financial services, telecoms, media and IT. There is a common set of needs the smart card can meet.” He accepts that electronic cash will not become widespread until most consumers have smart cards.
Leo Campbell, new business director of direct marketing agency Claydon Heeley, says: “Smart cards offer added-value to the customer. For the banks, it is about control. This is too big and too fundamental to fail.”
Fail or not, the banks will hold the key to smart card developments. They will be in a position to form partnerships with retailers, transport and petrol companies, utilities and brand owners and will be thrust into a central role in the new world of marketing through smart cards.
Crucial to this development will be the standardisation of smart card technology, enabling all cards to be compatible across outlets and retailers. The new credit and debit cards to be introduced over the next three years in the UK follow a standard run jointly by Europay, MasterCard (which has a 51 per cent stake in Mondex) and Visa – the EMV standard.
But there are two competing operating systems, the Mondex-backed Multos and the Visa system based on Java technology. These systems are still waiting for the applications that will determine their success, and this will depend on the type of partnerships they forge – the aim being to bring together banks, transport systems, retailers and loyalty schemes on one smart card.
While consumers may not be ready to open their electronic purses yet, the UK loyalty industry is eager to get their chips working for them. So far, chip card schemes are limited to the likes of Shell Smart card and the Boots Advantage card. The industry insists smart cards will take off in a big way, and dismisses the failure in New York as teething troubles.
Parsons says: “They are not being sold to consumers at this stage. It’s too early to say that because one scheme has failed there is no need for the product.”
But, until an application can be found to make smart cards valuable to consumers, money will continue to be invested in them with the chances of payback still many years off – if ever. In the meantime, loyalty cards have retreated into a war of attrition. Supermarket retailers cannot afford to be without them, but there is still a long way to go before smart cards can provide breakthrough benefits for consumers and marketers.