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Roger Clarke's 'Chip-Based Payment Schemes'

Chip-Based Payment Schemes
Stored-Value Cards and Beyond

Roger Clarke

Principal, Xamax Consultancy Pty Ltd, Canberra

Visiting Fellow, Department of Computer Science, Australian National University

Version of 15 September 1996

© Xamax Consultancy Pty Ltd, 1996

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The chip-card, sometimes called a 'smart card', was invented over two decades ago. A variety of applications have been successful already, many in fairly specific settings. One of the most promising applications is commonly referred to as the 'stored-value card' (SVC), and involves an electronic equivalent of cash being carried on a conventional plastic card which has been augmented with a chip.

Stored-value cards have been much-discussed, and have been the subject of a significant number of trials, in various countries around the world. Fully operational schemes, however, have been the exception rather than the rule.

In many cases, schemes have been undertaken with competitive advantage in mind. By making innovative use of a technology, a corporation may seek to gain 'first-mover' advantage over its direct competitors, and perhaps over its suppliers and customers as well. Such schemes, however, have proven to be very substantial undertakings, beyond the resources and influence of even very large corporations. As a result, two main models exist:

Australia is often used as a testing ground for new technologies and new applications of technologies. Important among the reasons for this are that it has an open and well-developed economy, and corporate purchasers and consumers who are amenable to new ideas and experimentation.

Stored-value cards are no exception to this rule. During 1995-96, Australia has been playing host to four pilot schemes. Two of these are developments by Australian companies and integrate overseas cards with Australian terminal and server technology; and the other two are the first forays by the giants of payment systems worldwide. These four schemes are shortly to be followed by a fifth.

This document's purpose is to provide a sourcebook on SVC schemes, and a springboard for a more open-ended set of chip-card applications.

The first Part reports the results of a longitudinal study of an important overseas scheme, undertaken by the author between 1988 and 1996. This provides an in-depth appreciation of the technical, organisational, consumer and strategic considerations involved.

The second Part provides comprehensive descriptions of the five schemes that are directly relevant to Australia. These chapters are supplemented by an introduction that identifies their salient features, and a summary and prognosis.

Hard evidence about stored-value card schemes is difficult to come by, yet it is vital to a proper understanding of them, and to strategic and policy decision-making concerning them. This document provides an important contribution to that understanding, especially if read in conjunction with the report of the Australian Commission for the Future, of August 1996, which examined their social impacts.

This publication has been possible because of the willing participation of a large number of people who are driving the projects I've studied. Rather than list them all here, I've taken the approach of listing their names and contact points at the end of each Chapter. I record my professional and personal thanks to them all.

In addition, I have benefited greatly from my associations with a number of people in the Australian industry, especially those people in organisations with which my company enjoys a strategic relationship. My thanks to David Jonas, Ian Christofis and Kevin Jeffery of Electronic Trading Concepts - ETC, to Jo Fisher and John Mills of the Monash University Centre for Electronic Commerce, and to Michael Walters of Cards ETC.

The early phases of the study of chip-cards in Switzerland were undertaken during my tenure as a senior academic at the Australian National University. I record my appreciation of the importance of the outside studies programme conditions that enabled me to undertake occasional lengthy visits to Europe.


Preface iv

Part 1. In-Depth Study - Chip-Cards in Switzerland 1

Chapter 1 - 1985-92 2

Chapter 2 - 1992-93 39

Chapter 3 - 1993-96 58

Part 2. Schemes Directly Relevant to Australia 73

Overview 74

Chapter 1 - QuickLink 78

Chapter 2 - CiT / TransCard 88

Appendix - Mikron Mifare Contactless Technology 103

Chapter 3 - MasterCard Cash and Visa Cash 117

Chapter 4 - Mondex 148

Part 3. Summary and Prognosis 173

Part 2: Schemes Directly Relevant to Australia

Australia was not an early mover in the stored-value card stakes. On the other hand, most of the early schemes ran their course, achieved only moderate success, and did not proceed to large-scale implementation. During the mid-1990s, Australia has suddenly leapt to world-prominence, with four pilot schemes in operation, and a fifth pending.

The players are:

* Quicklink, operational in Newcastle since November 1995

This scheme is a re-chargeable, anonymous value-card, implemented by an Australian company in response to a tender from the N.S.W. government in relation to public transport. Value can be loaded using a conventional debit-card or credit-card transaction, or using cash.

* Transcard, operational in Western Sydney since March 1995

This scheme uses a multi-segment contactless card, and offers ticketing and rewards-schemes as well as stored-value. It is presently an anonymous card, with a second, identified card planned for introduction. Value can be loaded using a conventional debit-card or credit-card transaction, or using cash.

* MasterCard, operational in Canberra since March 1996

This scheme provides an identified stored-value scheme as an add-on feature to MasterCard credit or debit cards issued by three participating banks. The value can only be replenished from the linked cheque or savings account.

* Visa, operational on the Gold Coast since November 1995

This scheme presently offers an anonymous, disposable payment card, which is to be supplemented during late 1996 by re-loadable, personalised cards.

* Mondex, announced in June 1996

This scheme, in trial in Swindon in the United Kingdom since July 1995, is to be implemented by the major Australian banks in the near future. It supports so-called 'peer-to-peer' transactions as well as conventional consumer-to-merchant payments. The Chapter on Mondex provides a particularly close examination of that scheme's privacy implications.

The five schemes differ considerably in the details of their sponsors, intentions and designs. For a full appreciation of these differences, it is necessary to read the individual reports. The following table extracts some key points.

The diversity of the schemes provides Australian scheme sponsors, financial institutions, payment scheme operators, merchants, equipment and software providers, policy and regulatory agencies, consumers and consumer advocacy groups with an unrivalled opportunity to assess opportunities and threats involved in stored-value technologies and applications.

Part 3. Summary and Prognosis

This publication's primary purpose has been to present information about those chip-card applications which appear to be most important to the direction of payment schemes in Australia. Generally, each chapter is self-contained, and provides a description of the scheme, together with a limited amount of interpretation. This section draws out some general conclusions that emerge from the individual reports.

Several important messages were learnt from the Swiss experience. These include:

The approaches that MasterCard and Visa have been adopting reflect these considerations. These are the big players in international payments, with an interest in maintaining or improving their market share, and holding off would-be intruders. As associations whose function is to service financial institution members, they have to be careful not to get too far ahead of, or intrude unduly into, their members' own strategic initiatives and alliances.

Visa and MasterCard have very large and effective systems in place, supporting credit-card, debit-card and ATM withdrawal transactions worldwide. They have no interest in encouraging migration away from these payment mechanisms any faster than it might in any case occur. Their focus is accordingly on support for transactions not currently, or not economically, supported by existing services.

Meanwhile, additional players are active in the Australian marketplace. These companies perceive opportunities either in conjunction with the large players, or in niche markets of one kind or another. Mondex may have the requisite characteristics to play on a world stage, either becoming a world force in payments schemes in its own right, or forcing the hands of MasterCard, Visa or both. The taking up of the Australian franchise by a consortium of the major banks can easily be read as an endeavour to counter-balance the market power of the existing payment processors.

A further feature of the Mondex scheme may transpire to be one of its most important. Through the development and widespread sale of cheap add-on terminals for workstations, it lends itself to net-based payment mechanisms. This would involve both value-download onto the card, and value-transfer over the net to other parties. Hence Mondex may be the most Internet-ready of the schemes.

The Australian products CiT and Quicklink appear likely to achieve their successes in niche markets. Quicklink's advantage lies in its close association with a company deeply involved in the supply of equipment to the public transportation industry. This market segment is only slowly attracting the serious attention of financial institutions, and hence a window of opportunity exists during which the company may be able to establish a significant market presence.

CiT's special claim is in the scope of its applicability. It is, intrinsically and from its first trials, a multi-application scheme, and can as readily target ticketing, or incentive-and-award schemes, as payments. Its use of contactless-card technology gives it access to markets that cannot be as readily addressed by other schemes. CTA has quite expressly set out to exploit its product's versatility.

Before it can settle into its own rhythm, the stored-value cards market is being shaken by the next wave of change in the payments arena. Net-based payment mechanisms are already available in significant numbers, and some appear to be beginning to have an impact. In principle, each of the schemes that are discussed in this publication is capable of being applied to payments by wire. Some have natural advantages in the area, however, especially Mondex. Moreover, additional suppliers, such as Digicash, may prove to be able to span the point-of-payment and point-of-network-connection markets in a manner attractive to consumers.

The range of payment applications of chip-cards in Australia is deliciously diverse. This is to our advantage, because it provides us with a much better appreciation of the alternatives that are available, and of the complementary services that are needed to support such schemes. This is to our advantage as a nation, because it provides us with the opportunity to create new 'clever country' industries; and to establish regulatory regimes that are supportive of innovative business, yet protective of the interests of consumers and small businesses.

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Created: 15 September 1996 - Last Amended: 15 September 1996 by Roger Clarke - Site Last Verified: 15 February 2009
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