WSJSmart

July 10, 2002 Issue

Smart Cards Escape the U.S. Mind

Smart cards are all dressed up with no place to go. A few years ago, they were touted as the next generation of credit cards, useful not only for shopping on the Internet but also for making small purchases -- drawing money from a bank account to pay for groceries, dry cleaning or even a pack of gum at the local convenience store. Smart-card believers, and the companies founded around their faith, pointed to the cards' popularity among European and Asian consumers as proof that American consumers would embrace them as well. So far, smart cards have been a failure in the U.S. A test run on New York's Upper West Side in 1998 flopped because the technology involved in processing payments was cumbersome and prone to glitches, and consumers saw little advantage in using the cards instead of cash. The spread of debit cards also has given consumers little incentive to use a smart card.

Having seen the near-complete failure of large-scale smart-card applications, a handful of companies now are thinking small. They're seeding rock concerts, movies and playgrounds with smart cards, hoping to spur young consumers to adopt the technology.

"The young-adult marketplace is the ideal place to start with new technology, especially if it's low cost," says David Morrison, president of TWENTYSOMETHING Inc., a Philadelphia, Pa., marketing-research firm that focuses on young people. "The companies can start recovering some capital investments and get a better feeling about the applications."

The theory goes that once American kids have adopted the technology, their parents will become more familiar with it, and eventually more comfortable in using it. "Not only are you conditioning the youth market, but through demonstration and explanation, the larger market as well," Mr. Morrison says.

One of the chief lessons learned in the 1998 experiment was that the cards need to offer more than just a cash substitute. The project's credit-card sponsors said in the future they would like to put more functions on the cards -- for example, allowing you to use the cards as subway passes or phone cards in addition to making simple purchases -- and would introduce wider loyalty programs that offer perks to users.

Targeting the insatiable youth appetite for computer games, StatCard Entertainment, of Norwalk, Conn., released its TXAction Skate interactive game this winter. Players get Web access to the game with a special smart-card reader, then can upload their game data to the cards, to be traded with friends. The cards and readers are available at retail chain Toys 'R' Us Inc. StatCard says about 50,000 cards have been sold. (It's $7.99 for the first skate card. The card reader is sold separately for $14.99).

Expansion plans include a variety of Smart Trading Card series based on movies, music, professional sports, and television shows, the company says. This fall, StatCard will introduce a Mattel Hot Wheels car along with a smart card that provides users with access to a special online Hot Wheels game.

Teen-draw Britney Spears is featured on a smart-card reader and cards with the pop singer's image, as well. Internet PLC, a U.K.-based company, developed the SmartFlash content with Ms. Spears and is selling the kits at her summer concert stops in addition to her Web site. The Britney smart card buys fans access to a secure Web site with video clips of her trip to Europe, e-cards to mail to friends and a preview of her upcoming video game. Other cards to be sold later in the year will give users access to different content. More than 25,000 kits have been sold at a cost of $29.95 apiece.

Later this year, Internet PLC will introduce similar kits for Star Trek: Nemesis, the latest installment from Paramount in the sci-fi series. They will be sold online and in stores and will tie in with promotions at movie theaters. On opening night, for example, moviegoers would receive a special promotional card that gives a preview of the special content. The industry is pinning its hopes on the idea that providing content to which consumers have a personal connection -- and is decidedly less scary than putting your financial information on a portable computer chip -- will drive adoption.

Smart cards have long been popular in Europe and Asia. In Hong Kong, the Octopus card started as a simple subway-fare card, but is now accepted by businesses ranging from fast-food giant McDonald's Corp. to local movie theaters, and even street parking meters. The cards also are increasingly used for security purposes at schools and residential complexes.

But smart cards haven't gained the same traction in the U.S., analysts say, largely because retailers have been reluctant to upgrade and install higher-end processing equipment necessary to read them. American Express Co.'s ballyhooed Blue card, introduced in late 1999, garnered a lot of attention but few takers. The card, which featured the smart-card chip technology, was expected to make shopping online more secure.

But... many people using the cards at home didn't have readers. In stores, instead of tapping into data stored in the chip, purchases for the most part were processed the old-fashioned way: sliding the card's magnetic strip through a traditional credit-card machine. Aside from the Blue card, smart cards have flown low on the radar screen. A survey of 4,000 Internet users in May 2001 showed only 2% of respondents had a smart card, and just 1% had both a smart card and an electronic reading device. A full 33% hadn't even heard of the concept.

That's why smart-card industry analysts are skeptical that simply marketing content will be sufficient to drive adoption. For one, says Earl Perkins, an analyst with Meta Group in New Orleans, use of smart cards depends on the infrastructure to support them. As with the Blue card and New York City trials, the right technology to read the cards wasn't at hand. Unless consumers and sellers both have the ability to read smart cards, people won't use them. "You need to introduce reading capability at the same time you introduce the card," he says.

But by selling the readers at a low cost, along with a branded smart card, he says, at least consumers have the ability to use them. The entertainment-themed smart cards are a reasonable attempt at building momentum toward adoption, Mr. Perkins says, because it's simple and relaxing to users. "If there's any complexity involved whatsoever, it eventually becomes a flash in the pan and dies out," he says. "But if [the entertainment smart cards] do nothing else but bring about awareness, that would be a good thing."

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