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Presentations
ELECTRONIC CASH IN CANADA: LESSONS LEARNED a presentation to THE WORKSHOP ON PROMOTING THE USE OF ELECTRONIC
PAYMENTS OF THE FEDERAL RESERVE BANK OF CHICAGO
October, 1999
By Catherine Johnston,
President & CEO,
The Advanced Card
Technology Association
of Canada
I would like to thank
all the organizers
for the opportunity
to be here today.
If
this room were full
of lawyers, I would
start
my comments with
a number of disclaimers,
but as most of you
are not, perhaps
I can
get away with an
explanation instead.
I feel very humble
being on this stage
with
my fellow panelists
who are better known
to you. You may wonder
what The Advanced
Card Technology Association
of Canada would
have to add to this
topic.
For the past eleven
years, our association
has promoted the
awareness, understanding
and use of advanced
card technologies,
which
by definition are
those which use technology
more advanced than
magnetic stripe.
In that
role, we have worked
with regulators,
legislators
and companies as
they dealt with the
introduction
of new financial
and other applications.
Before I start, I'd
like to offer a few
definitions.
You don't have to
strictly agree with
these,
but they will help
you understand what
ACT
Canada means by certain
terms. The first
is smart, or chip,
card. This is a PC
on
a piece of plastic,
complete with an
operating
system, application
software and application
data. You should
also think of these
as distributed
data centers.
Stored value, from
our definition, is
electronic
value that resides
on the chip and can
be
spent at participating
merchants. E-cash
differs as it can
also be transferred
between
individuals, emulating
cash. Lastly, you
will hear me refer
to FI's throughout
my
presentation, a term
that includes banks
and credit unions.
So, to get started,
today I will focus
on
business cases, smart
cards, credit, debit
and fraud. I am however,
going to stray from
our published topic
and talk not only
about
lessons learned but
also of some not
yet
learned!
Let's start with
business cases.
BUSINESS CASES
Canada is acknowledged
for its outstanding
payment system, which
is remarkable given
the vast size of
the country coupled
with
a very small population.
We have close to
4 million square
miles with just over
30
million people, not
numbers that make
for
good business cases.
To put this into
context,
Canada is 233 thousand
square miles larger
than the US but has
237 million fewer
people.
These numbers, as
I said, have challenged
Canadian financial
institutions, retailers,
governments and others
when it comes to
business
cases.
Furthermore, one
in five Canadians
live within
100 miles of Toronto,
one in three live
in
Vancouver, Toronto
or Montreal but all
Canadians
expect easily accessible
access to banking
and payment services.
We have seen successful
business cases built
to introduce stored
value and electronic
cash, but these have
not yet translated
into
successful business
cases for national
rollouts.
I will come back
to the subject of
business
case lessons in a
minute.
Mondex, Proton and
VisaCash have all
been
introduced in Canada.
Both Visa Cash stored
value and Mondex
e-cash are still
in use
and have been the
source of many lessons.
Although I know of
many of the elements
of
those business cases,
I have not been privy
to the actual documents
and therefore cannot
tell you the finer
points of each case.
I
am happy though to
share with you the
lessons
learned from the
pilots and early
implementations.
VisaCash has been
running in Barrie
Ontario
for more than a year.
Over that period
it
has expanded its
single stored value
application
and added a loyalty
program. It is used
by
the local transit
for buss fares and
throughout
the college campus
as a student ID,
library
card and facility
access. Mondex was
initially
implemented in Guelph,
where it ran for
more
than a year. This
summer, two of the
Mondex
Canada members launched
a multi-application
system in Sherbrooke,
Quebec. The Mondex
e-cash application
resides on the chip
coupled
with debit on the
magnetic stripe.
Proton,
which ran under the
name, EXACT, was
piloted
in Kingston, Ontario.
Many lessons were
learned from these
pilots.
Critical mass is
a prerequisite for
success.
Consumers need a
critical mass of
merchants
who accept the new
payment cards and
merchants
need a significant
number of electronic
transactions.
It is very difficult
to introduce stored
value in a geographically
bound area unless
the population conducts
its day to day business
in that area. If
consumers commute
into or
out of the area it
means that they also
shop
somewhere else. When
that happens they
require
traditional cash,
that is bills and
coins,
and as a result they
limit the amount
of
money they are willing
to carry electronically.
Most promising applications
have turned out
to be stored value
in closed environments
and unattended point
of sale. Consumers
readily
understand the benefits
of UPOS devices such
as parking meters,
vending machines
and coin
laundries. This in
turn promotes their
acceptance
of stored value in
other transactions.
Closed
environments can
be campuses, shopping
malls,
airports or any area
that is geographically
bound in terms of
locations where consumers
will acquire products
or services.
While we are on this
issue let me point
out
the first "elephant
trap". Ladies
and gentlemen, there
is no killer application.
I regret having to
state that, but the
reality
is that too many
North American organizations
are hanging back
waiting for the "Spreadsheets
of smart cards".
Well, we can't go
back
to the time when
one application could
drive
the introduction
of a new computing
platform.
No matter how much
you like and would
use
word processing,
you aren't likely
to buy
a PC based on that
single application.
Consumers
and corporations
are all accustomed
to product
bundles.
What we need to determine
is which applications
for smart cards are
early successes and
bundle
them for specific
groups. Is it transit
with
stored value and
loyalty? Is it data
and
Internet security
with smart credit
and secured
ID? Each of you will
have to determine
which
bundle is best suited
to your needs and
opportunities.
Now, back to lessons
learned in the pilots.
The amount of support
required for merchants
will exceed your
expectations and
it must
be available 24/7/365.
When a clerk is closing
the store at midnight,
and has a question,
it may require an
answer in order to
cash
out. In addition
to merchant support
you
will need more consumer
and press education
than you would realistically
expect.
Cultural and age
differences also
exist.
In Canada, Quebecers
and youth are more
likely
to be early adopters
of new technology.
When
selecting a pilot
site and building
your
business case, you
should take these
into
account. For the
most part, Canadians
have
proven themselves
to be avid users
of the
products and services
offered by payment
cards. Our 30 million
Canadians carry more
than 60 million credit
cards and last year
we processed more
debit card transactions
than the entire population
here in the US.
Reload points provided
us with another lesson.
In Guelph the reload
devices consisted
of
ATM's, home and pay
phones. We learned
that
home phones were
very popular with
approximately
half the reloads
done by these home
devices.
Pay phones however
were rarely used
as load
devices. Convenience
drove the use of
the
home phone use.
I promised I would
return to the subject
of business cases,
which brings me to
the
second elephant trap
and the first lesson
not yet learned by
enough financial
institutions
You cannot build
a business case for
chip
(Smart) cards for
a single product.
Chip
must be seen as a
strategic platform
for
the delivery of many
new and future products
and services. Chip
offers the enhanced
security
and flexibility required
to redefine service
delivery, both retail
and commercial. Only
when you accept chip
as a strategic tool
can you build the
case for the infrastructure
costs. If you try
to justify the cost
of
the infrastructure
in a business case
for
a single product,
you will not likely
succeed
unless the deployment
of devices is very
limited.
This is also in part
true for governments,
but is less of an
issue for retail
applications,
which operate in
somewhat closed environments.
Let's look at fraud
as a basis for business
cases.
In 1997, credit card
fraud losses in Canada
were $126.5 million
(Cdn). Last year
we saw
an increase of over
20%. This can be
attributed
to the state of the
global economy. As
the
Asian economy suffered,
fraud shifted to
other areas.
Last December, the
Royal Canadian Mounted
Police conducted
a raid in Toronto
and seized
5,000 gold Visa cards.
Each of those cards
would generate approximately
$3,000 in revenue
for the counterfeiters.
During this raid
the RCMP also seized
Citizenship Card
templates,
Government of Canada
cheque plates, blank
driver's licenses
and Social Insurance
Number
card templates. The
crooks were also
engaged
in debit card skimming,
a process of reading
information from
valid debit cards
to allow
the creation of counterfeit
cards.
Debit cards as well
as credit cards are
a
growing target for
fraud. No one can
claim
that it is victimless.
If you are a victim,
your first indication
may be an empty bank
account. In the Toronto
raid, two organized
crime groups were
working together;
one to
supply the numbers
and data and the
second
to build the cards.
There is no doubt
that
card fraud is no
longer casual or
random,
but has become a
highly profitable
business
endeavor for organized
crime. We have also
now seen the first
pinpad device that
was
equipped with a built
in camera to capture
the user's pin. When
you see this trend,
combined with the
fact that approximately
45% of existing credit
card fraud comes
from
counterfeiting, you
might believe that
there
is a strong business
case for smart credit
and debit.
While many of us
believe that is true,
we
are not seeing recognition
of this in the
North American market
place. England however
has reacted to this
situation and is
moving
to smart credit and
debit, rather than
run
the risk of losing
consumer confidence.
This June, Derek
Fry, President of
VISA Canada,
said that if the
financial institutions
in
Canada were to share
debit fraud information,
as we do credit,
we would likely be
far more
concerned. He went
on to say that if
Canadians
lost confidence in
credit and debit,
there
would be neither
enough tellers nor
bricks
and mortar to return
to payment by cheque.
I am now seeing indications
that our FI's
are beginning to
look at this situation.
They are also now
determining what
it would
take to build a national
infrastructure.
One last note on
business cases for
stored
value. Traditionally,
we have failed to
tell
merchants and consumers
the cost of handling
cash. Although the
cost to FI's has
been
present in each business
case, it is time
to share that information
with the payment
system stakeholders.
So, let's move onto
the technology.
TECHNOLOGY
Smart cards are a
very rich facilitation
tool. They allow
FI's and retailers
to offer
a myriad of new products
and services, with
a level of security
never before available
on a consumer carried
card. This technology
should be viewed
as a network device.
Thinking
back to the introduction
of ATM's, it was
when fi's agreed
to network and share
ATM's
that consumers really
adopted the service.
Again, it is the
network of merchants
and
POS devices that
have made credit
and debit
globally successful.
We have learned that
this technology redefines
competition, often
promoting or even
forcing
new partnerships;
FI's with governments,
transit authorities
and FI's, retailers
and
FI's, among others.
For example, transit
authorities, which
in the past have
paid
FI's to process their
cash, are now approaching
those same FI's and
offering to rent
them
space on their "Smart"
transit
cards. A transit
system such as Toronto
that
issues millions of
cards will reach
consumers
from every major
bank and can now
charge
to be a delivery
channel for bank,
retail
and even government
applications.
Another lesson learned
in the area of the
technology is that
North American organizations
must develop some
expertise. This means
that
we cannot afford
to continually build
our
plans around emerging
technologies such
as
new operating systems,
evolving platforms
or next year's devices.
It is important to
drive a stake in
the ground, pilot
or implement
a basic application
and grow from there.
This is where you
will learn lessons
that
will significantly
contribute to the
success
of your long-term
plans.
One of the reasons
this is so important
is
that standards and
technology continue
to
evolve at a rate
comparable to the
rest of
the computing world.
STANDARDS
There are a myriad
of standards around
cards,
devices and applications.
Lacking, however,
are standards that
would promote the
vision
of any card/any application
coupled with
any card/any terminal
and any application/any
terminal. There are
groups working on
these
issues. The Open
Card Framework and
NIM start
to address these
visions, but all
parties
must move to build,
promote and adopt
standards
that will bring a
richer mix of devices
and
users.
We have learned that
unattended point
of
sale is an early
winner, but there
is a need
for standards that
would allow vending
devices
to move to stored
value payment. Unfortunately
there are many machines
out there that are
thirty years old
and all have been
built
to varying specifications.
Not only that,
but also many machines
are modified in the
field, making retrofits
difficult, expensive
and sometimes impossible.
In the area of standards,
progress will be
made when each sector
focuses on its core
expertise to define
the standards and
technology
required to support
their strategic plans
and products. This
must happen before
integrators
can put the pieces
together to support
multi-application
card systems.
In conclusion, I
would say that we
have taken
an understandable
but dangerous stance
in
North America. We
did not implement
smart
cards for telecommunications
as quickly as
other countries because
we didn't have the
same problems. We
didn't implement
smart
cards for credit
and debit, because
we didn't
have the same problems.
We've not moved as
quickly as many third
world countries,
because
we have an existing,
functional infrastructure
that would be expensive
to replace. All this
was not a problem
twenty years ago
when smart
cards started to
work their way into
use
elsewhere. But in
world that is becoming
increasingly borderless,
where the internet
makes global commerce
available to the
average
consumer and where
fraud is the growth
industry
of the decade, we
are falling behind.
The planning, development
and implementation
cycles run from months
to years, so I urge
you to look at your
risks and opportunities.
We invite you to
keep in touch with
ACT Canada
as you travel into
this exciting New
World.
Thank you.
Catherine Johnston
President & CEO
ACT Canada
905 426-6360
ACT Canada is an international non-profit
association for the advancement of card technologies.
We work on behalf of our members to promote
the awareness, understanding and use of all
advanced card technologies; including optical,
smart, capacitive and emerging technologies.
If you would like to learn more about ACT
Canada membership please visit the membership section of our web site or contact our office at
(905) 426-6360.
Please forward any comments, suggestions,
or questions to info(AT)actcda.com
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