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SMART CARDS

SMART CARDS

Smart Cards

Smart cards, also called stored value cards, use magnetic stripe technology or integrated circuit chips to store customer-specific information, including electronic money. The cards can be used to purchase goods or services, store information, control access to accounts, and perform many other functions.

Smart cards offer clear benefits to both merchants and consumers. They reduce cash-handling expenses and losses caused by fraud, expedite cus-tomer transactions at the checkout counter, and enhance consumer conve-nience and safety. In addition, many state and federal governments are considering stored value cards as an efficient option for dispersing govern-ment entitlements. Other private sector institutions market stored value
products to transit riders, university students, telephone customers, vend-ing customers, and retail customers.

One successful use of stored value cards is by New York’s Metropolitan Transportation Authority (MTA). The MTA is the largest transportation agency in the United States and,
through its subsidiaries and affiliates, op-erates the New York City subway and public bus system, the Long Island Railroad and Metro-North commuter rail systems, and nine tolled intrastate bridges and tunnels. These facilities serve four million customers each workday. In 1994, the MTA began the operation of an automated fare-collec-tion system based on a plastic card with a magnetic stripe. The MetroCard is either swiped through
a card reader at subway stations or dipped into a farebox on buses where the fare is decremented. All 3,600 MTA buses became operational in 1996. The full complement of 467 subway stations is ex-pected to be operational by mid-1997. By 1999, the MTA anticipates more than 1.2 billion electronic fare collection transactions a year on subway and bus lines.

The management challenges created by smart card payment systems are formidable. Institutions such as the MTA have made a considerable invest-ment in the stored value card processing network, and to get a good return on investment must identify new and innovative ways to achieve addi-tional operating efficiencies and value. For example, many commuters in the New York area use two or three different mass transit systems to get to and from work. Each of these systems bears the expense of maintaining its own proprietary network. In addition, the customer ends up having to manage two or three
different fare media, and make two or three times as many free purchase transactions. New regional initiatives will be necessary to integrate the multiple networks, and to make it cost – effective and possible to implement a region wide transportation fare payment system that will link all of the transit providers in that region.

The Federal Reserve recently created a Payments System Research Group to define the key public policy issues related to the evolution of the smart card payments system. Some of the questions being studied include: When is an account deposit insured? Is the account still insured when the value has been loaded on a smart card? Is the value on a smart card consid-ered cash? Is a smart card more like a traveler’s check or a credit card?

One reason for the success of stored value cards is that their application focus is narrow and they build upon existing infrastructure such as: credit, debit, and ATM cards; funds-
clearing and settlement mechanisms; regional and national ATM/POS networks; and retail, corporate, and government customer relationships.

It remains to be seen how the integration between smart cards and online commerce will takesplace.

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