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Presentations
MOVING TOWARD A CASHLESS
SOCIETY presented
at TREASURY MANAGEMENT ASSOCIATION OF CANADA
- THE ART OF TREASURY
MANAGEMENT
October, 1999
By Catherine Johnston,
President & CEO,
The Advanced Card
Technology Association
of Canada
Thank you Drew (Brown
of Scotiabank). I'd
like to thank John
Bumister and the
Board
and members of TMAC
for allowing me to
share
some thoughts and
observations with
you today.
I'm very happy to
be here and on behalf
of
my board of directors,
I bring you their
best wishes for a
successful conference
and
continued success
as you move into
the future
of stored value payments.
I'd also like to
thank Scotiabank
and Scotia
Capitol Markets for
sponsoring my participation.
When John invited
me, he suggested
that I
could be controversial
which worries me
a
little. For the past
two years we have
both
sat as members of
the Canadian Payments
Association
Stakeholder Advisory
Council and I'm not
sure whether John
meant that I should
be
more controversial
than normal. Hmmm…
Well at any rate,
before I start, I
must
tell you that I have
a problem today.
I truly
do appreciate Scotiabank's
sponsorship, and
indeed I have a personal
banking relationship
with the institution,
but I wish that it
had been any other
organization because
I
am going to say things
today, in the context
of this presentation,
about Scotiabank.
What
I am going to tell
you is true, it is
accurate,
and I'm afraid it
is very complimentary.
Scotiabank has taken
a unique position;
one
I hope that other
Canadian financial
institutions
will follow quickly.
So you see my dilemma.
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
is stored value,
but differs as it
can also
be transferred between
individuals, emulating
cash. Lastly, you
will hear me refer
to FI's,
financial institutions
throughout my presentation;
a term that includes
banks and credit
unions.
Now, to get to the
heart of the matter.
Are
we truly moving toward
a cashless society?
There is no controversy
here. The answer
is yes, we have been
doing that since
shortly
after Canada abandoned
playing cards as
currency
and moved to bank
notes. Cheques, credit
and debit have all
eroded the use of
cash
because they provided
a more convenient
way
to pay for goods
and services. In
spite of
this, we still use
cash. There is comfort
in holding it, counting
it and protecting
our privacy when
we use it. Unfortunately,
as we move to more
and more coins, there
is little comfort
in physically carrying
them or being in
line at the cash
register
behind the person
who insists on counting
out the exact payment
in coins.
Stored value and
electronic cash are
a natural
evolution in the
payment landscape.
They
were also once thought
to be the "Killer
Application"
for smart cards.
In North
America, Canada took
a dominant lead in
the
introduction of stored
value products on
smart cards. Let's
take a moment to
look
at the technology
that is making all
this
possible.
SMART CARDS: A VARIATION ON A THEME
Smart, or chip cards
are one technology
that
is changing banking
in North America.
I am
sure that you are
already familiar
with these
cards, but I'd like
to stop and review
what
we know. Think back
to mainframe computers.
They certainly changed
the way we did business.
From mainframes we
went to mini computers,
allowing distributed
data processing,
again
changing the way
we did business.
From the
mini we went to PC's
and from PC's to
laptops.
Then came notebooks
and palmtops. Then
came
smart cards; computers
on pieces of plastic.
You see, smart cards
are merely the next
step in miniaturization.
Your ability to
put a computer, and
for that matter,
a distributed
data center, into
your customer's wallet
opens exciting new
possibilities.
It comes as a surprise
to many people that
this technology is
not new, but is in
fact
almost thirty years
old. In 1969, early
versions
of smart cards were
developed simultaneously
in Japan and France.
Each developer was
unaware
of the other's work,
but was struggling
to
design a solution
for a business problem.
Over time the card
has indeed become
smarter,
and has found acceptance
in Europe, Pacific
Rim countries and
third world countries
where
mag stripe infrastructures
do not exist.
Over the past ten
years they have gradually
found their way into
North America, with
Canada starting to
show a strong lead
in
the introduction
of smart card based
financial
products. These include
not only Mondex,
Proton and VISACash;
but also the highly
successful Bell Canada's
Quick Change Card.
This movement within
Canada has attracted
international scrutiny.
Last year a group
of European bankers
met with ACT Canada
to
discuss our market
place and whether
we believe
there is room for
additional electronic
purses.
In addition to stored
value and e-cash,
Canadians
now use smart card
based loyalty programs
at Boutique San Francisco,
San Hubert and
Le Normandin restaurants
among others. Electronic
purses are in use
at Le Capitole in
Quebec
City, on the University
of Toronto campus
and by Parks Canada
at Banff. McDonalds
and
other partners support
the community based
Quebec Soccer Federation
through the use
of smart cards at
partner locations.
These
are just a few of
the existing implementations
throughout Canada.
There is no question
that
the technology is
working its way into
our
payment landscape.
Bell and Microcell
are using the technology
in telecommunications.
Ajax, Pickering and
Burlington Transits
in Ontario are using
smart cards for fare
collection. Other
Canadian
implementations include
physical access,
time and attendance,
parking payment,
golf,
electronic gift certificates
and health care.
Canadians will never
be large volume users
of these technologies,
but we are very innovative
in our development
of both applications
and
devices and have
been responsible
for many
world firsts.
And so we continue
to move toward a
"less"
cash society. The
question we must
ask is
how quickly? To answer
that, let's look
at
the business case
and the lessons learned
from our early stored
value trials.
BUSINESS CASES
Canada is acknowledged
for its outstanding
payment system, which
is remarkable given
the vast size of
the country coupled
with
our 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 easy 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 cases
for national rollouts.
Mondex,
Proton and VISACash
have all been tested
here in Canada. Both
VISACash stored value
and Mondex e-cash
are still in use
and have
been the source of
many lessons. I am
happy
to share those with
you.
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 bus 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,
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.
Now, 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 now all accustomed
to
product bundles.
What we need to determine
is which applications
for smart cards are
early successes and
then
bundle them for specific
groups. Is it transit
fares with stored
value and loyalty?
Is it
data and Internet
security with smart
credit
and secured ID? Each
issuer will have
to
determine which bundle
is best suited for
their needs and opportunities.
Now, back to lessons
learned in the pilots.
The amount of support
required for merchants
will exceed 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
more consumer and
press
education is required
than you would realistically
expect.
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 as a way
to load e-cash onto
the
cards..
So, now back 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.
From my desk, I see
many of our financial
institutions looking
at various products
that could sit on
chip, but Scotiabank
is
the first to show
that they understand
the
strategic value of
smart cards as a
delivery
mechanism. This August,
Bryce Hutt of Scotiabank,
won an ACT Canada
Champion's Award
for his
work in this area.
So, what are the
driving forces?
THE DRIVING FORCES
Let's look at fraud
as a basis for business
cases. Certainly
it has an effect
on us as
business people and
consumers.
In 1997, credit card
fraud losses in Canada
were $126.5 million
(Cdn). Last year
we saw
an increase of over
20%.
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.
What would impact
would that have on
your
treasury management?
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.
Our next driver is
the
technology itself.
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 smart card standards
and technology
continue to evolve
at a rate comparable
to
the rest of the computing
world.
STANDARDS
I am often asked
about 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 have been built
to varying
specifications. Not
only that, but 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
again
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.
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
of the US. With
this type of receptive
market, you cannot
afford to wait. The
planning, development
and implementation
cycles run from months
to years, so I urge
you to look at your
risks
and opportunities
now. Don't wait.
All of this has probably
raised many questions
for you. I hope I
can answer some of
them
today, but I am pleased
to tell you that
ACT Canada will continue
to monitor this
subject. We are now
in our eleventh year
of studying the emergence
of these technologies
and we invite you
to join us in this
very
exciting venture.
Let me leave you
with a quote from
William
Blake:
"WHAT IS NOW
PROVED WAS ONCE ONLY
IMAGINED"
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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