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WSJ on NYC Smart Card Pilot

Technological Glitches Trip Up
New York Debut of Plastic Cash

Smart cards invaded New York last year, when four of consumer
banking's most sophisticated players began one of the biggest
real-world trials of plastic cash.

But right from the start, the closely watched effort slipped on an
unforeseen banana peel: technology.

In a test with far-reaching implications, Chase Manhattan Corp.,
Citicorp --now part of Citigroup Inc. -- MasterCard International and
Visa USA co-sponsored the pilot program, which began last October.
They distributed about 96,000 smart cards embedded with computer chips
to residents of Manhattan's Upper West Side. Then they watched to see
how willing people were to use the cards instead of cash.

The answer is, not very, according to merchants and consumers. A big
reason was the support network of hardware was so riddled with
technical and logistical headaches that it often made using the smart
cards a hassle instead of a breeze. Usage has dwindled to a trickle.
More than a third of the 600 merchants who signed up for the pilot
either have quit or were eliminated from the test by the sponsors.
Many of the ones who remain are fed up.

Smart cards figure in an antitrust lawsuit the Justice Department
filed against Visa and MasterCard Wednesday. The regulators accuse the
bank-controlled credit-card networks of holding back on efforts to
develop new products, including smart cards. Visa and MasterCard
denied the charges and vowed to defend themselves.

The smart cards in the Manhattan test work like the long-distance
phone cards that vending machines in supermarkets sell. The cards --
either a Visa Cash card issued by Citigroup's Citibank unit, or a
MasterCard Mondex card issued by Chase -- are filled with cash from a
person's bank account.

Users draw on the card's stored cash as they pay for merchandise;
store clerks swipe it through a special terminal at the point of
purchase. Users can refill the card with cash at a bank or automated
teller machine. For the test, there are no annual or transaction fees
for customers or merchants.

Tough Customers

The sponsors chose as their guinea pigs the Manhattanites who live in
the swath of real estate between Central Park and the Hudson River, an
eclectic stew of millionaires, welfare families, and everyone in
between. Many of these tough customers quickly found smart cards were
actually pretty dumb. For a start, they weren't accepted in taxis,
buses, and subways.

There also is a harder-to-explain psychological resistance to the
smart cards. "It seems rather un-American to me," says Greg Knight,
who lives on the Upper West Side and works at NYCD Compact Disks. The
store participates in the smart-card program but doesn't record many
transactions. Mr. Knight says he has a smart card but doesn't use it.

A busy Duane Reade drugstore on Amsterdam Avenue should have been a
good testing ground, because most of what it sells is low-priced. But
the smart-card scanners installed at the checkout break down two or
three times a month, says store manager Sammy Austin. After calling
the program's "help desk," Mr. Austin says, he has waited as long as
six days for a repairman, plus two more days for replacement machines.

"If they could improve the system, I think plenty of customers would
use it," Mr. Austin says. "But in a city like New York, where it's
hustle and bustle, everybody wants to be treated one-two-three, and if
you can't accommodate your customers, they're just going to forget
about it. It turns you off."

Sponsors say one reason for the high drop-off rate among merchants is
that there was never any screening: The program was open to any
merchant who wanted to join. The sponsors themselves later culled out
merchants who were recording few smart-card transactions.

Few Purchases

Zabar's, an always-crowded gourmet food store on Broadway, had its
share of technological problems early in the program. When calling the
help desk didn't help, the store bowed out of the experiment for
several weeks, says Zabar's manager David Tait. The store has since
returned, and things have gone more smoothly. Still, it rings up only
25 smart-card purchases a day, Mr. Tait says.

Many of the payment terminals that malfunctioned were made by
Hewlett-Packard Co.'s VeriFone unit, the biggest of the pilot
program's three hardware suppliers. Machines made by the other two --
Hypercom Corp., of Phoenix, and IVI Ingenico Inc., a Canadian-French
joint venture -- had early technical problems, too, the sponsors say,
but on a smaller scale.

VeriFone spokesman Dan Toporek acknowledges the glitches. "There were
instances where the machines weren't installed or configured
properly," he says. Still, he says Verifone regards the terminals as a

Nick Massimiano, vice president at Chase Manhattan, says the sponsors
moved fast to address the delays in service. A software adjustment
fixed many of the problems with the Verifone terminals, he says. Foot
patrols of repair technicians check in with merchants to help

Fairway, a bustling supermarket on Broadway, stopped taking smart
cards after just a few weeks. Employees there said it was a hassle to
process transactions on the smart-card terminal, which is separate
from both the cash register and the credit-card machine.

Other merchants complain about having to reconcile their terminals
with the smart cards' central computer at the end of the day, so the
smart-card purchases will land in their bank accounts. For this task,
the sponsors had presented retailers with various options, but some
employees never got the hang of the task. So at many of the stores, it
became a bothersome after-hours chore for the boss.

Mr. Massimiano says adjustments in the modem timing of the terminals
has made it easier for stores to settle accounts at the end of the
day. But the real issue here is training, not technology, he says. The
sponsors issued desktop guides for making the fund transfers. The
roaming foot patrols also provide training assistance, he says.

'A Less Positive Experience'

"Lots of little things, when you add them up, can create a less than a
positive experience," concedes Ron Braco, senior vice president and
director of electronic commerce for Chase Manhattan's consumer-banking
division. Still, the program has yielded some victories, he says. For
the first time in any test program, the Visa and MasterCard smart
cards were accepted on the same terminals.

Lessons learned suggest the four partners will shy away from broad
efforts to blanket an entire neighborhood, focusing instead on
specific retail niches in which smart cards are especially useful.

"I would say the time for experimentation is probably passed now,"
says Richard Phillimore, senior vice president of MasterCard's
chip-business group. "This really points the direction toward rolling
out not necessarily by geography but by merchant sector."

One such sector is small-ticket purchases -- launderettes and
newsstands, for example. In the latest chapter of the Upper West Side
test, smart cards have been introduced in basement laundry rooms in a
few of the neighborhood's apartment buildings. So far, the backers
say, they have been a roaring success: Smart card users don't need
piles of quarters any more. Chase says on average 25% of the laundry
revenue at the participating buildings comes from smart cards, and in
some locations approaches 40%.

"Once the card generates some excitement, people won't care that Duane
Reade had a problem at some point in time," says Chase spokesman
Kenneth Herz. Adds Judy Darr, director of the smart card program at
Citibank, "Our commitment to smart cards remains strong."

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