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Date Posted: 04:39:02 11/23/02 Sat http://www2.bc.edu/~cronin/CARDTECH.html ------------------------------------------------------------ CARD TECHNOLOGY July 2001 Issue ------------------------------------------------------------ Latin America Warms Up To Smart Cards By Daniel Joelson and Donald Davis At Terrapinn Ltd.s Latin Cards conference in Mexico City in late June, Pedro Francisco Zago Berra of Mexican bank Bancomer projected a slide showing the trends in payment card fraud in Latin Americas three largest economies. Brazils fraud went down over a recent two-year period, while fraud rose in Mexico and Argentina. ------------------------------------------------------------ Brazils downward curve is no accident. Bankers there, facing an explosion of credit card fraud following the widespread issuance of credit cards for the first time in the mid-1990s, introduced fraud-fighting techniques. These include software that detects unusual transactions and a decision by affiliates of both Visa International and MasterCard International to convert their magnetic-stripe credit and debit cards to fraud-resistant smart cards over the next few years. ------------------------------------------------------------ Zago, director of special projects at Bancomer, warns that criminals will flee to neighboring markets as they find themselves thwarted by Brazilian banks issuing smart cards that comply with the international EMV standard for credit and debit applications created by Europay International, MasterCard and Visa. ------------------------------------------------------------ Banks in Mexico should follow Brazil’s lead in moving to smart cards before fraud gets out of hand, he says. “EMV is the killer application,” says Zago. “It’s not a question of how much fraud we have today; it’s how much fraud we expect to have.” ------------------------------------------------------------ That fear of fraud losses has spurred the Association of Mexican Banks into action. Under its auspices, seven banks have agreed to a smart card pilot that could pave the way for a decision to upgrade Mexico’s more than 30 million bank cards to chip in five years, say banking officials. ------------------------------------------------------------ On top of those developments in Brazil and Mexico, the region’s two largest markets, MasterCard International recently announced aggressive deadlines for its Latin American members to move to chip and two new chip-based cards aimed at teenagers and young adults. Taken together, these moves could spur other banks in the region to move from mag-stripe to chip cards. ------------------------------------------------------------ Such a migration could have a ripple effect. If banks put millions of chip cards in consumers’ hands and convert thousands of point-of-sale terminals to accept smart cards, it could boost smart card programs popping up in such arenas as mass transit, universities, voucher programs and telecommunications. ------------------------------------------------------------ At the same time, mobile phone operators in the region will be ordering more smart cards, in the form of the small subscriber identity module chip cards that sit inside handsets used in GSM cell phone networks. ------------------------------------------------------------ Brazil announced plans last year to build a nationwide GSM network, and Mexico’s largest mobile phone operator also is moving to GSM, the most widely used mobile phone network protocol worldwide. ------------------------------------------------------------ Such developments figure to make Latin America a more important smart card market than it is today. The region represents about 20% of the worldwide chip card market in units, according to U.S.-French smart card vendor Schlumberger Ltd. However, a big majority of the 434 million chip cards Schlumberger foresees being sold this year in the region will be inexpensive memory cards used to make pay phone calls. ------------------------------------------------------------Telefonas de Mexico, the country’s phone monopoly, buys more than 200 million prepaid memory cards each year from Schlumberger and its chief rival, Gemplus International SA, and some other regional phone companies also accept chip-based memory cards in their pay phones. Such memory cards cost big telcos 20 cents or less in large volumes, whereas more sophisticated smart cards that can perform complex calculations and guarantee high security are priced at $2 and up. ------------------------------------------------------------ Moving banks from mag-stripe to chip cards alone would boost smart cards in Latin America, without considering the impact on other market segments. ------------------------------------------------------------ Banks in the region purchased 135 million mag-stripe cards in 1999, according to the International Card Manufacturers Association. ------------------------------------------------------------ This spring, in a significant step toward a regional smart card rollout by major banks, MasterCard International announced an aggressive timetable for its members to move to smart cards. ----------------------------------------------------------- That includes shifting the liability for a fraudulent transaction to the issuer or merchant not equipped to handle chip cards by January 1, 2004, a tangible incentive for both merchants and card issuers to make the move to smart cards. That is the earliest date for a liability shift set by any Visa or MasterCard region in the world. Europe, for instance will make that shift in January 2005. ------------------------------------------------------------ MasterCard’s liability policy is somewhat symbolic in Mexico, where all domestic transactions are handled internally, without going through Visa and MasterCard networks. Still, MasterCard executives predict that there will be 50 million chip-based MasterCard-branded cards in Latin America by 2005, half of the MasterCard-branded cards projected for the region at that time. ------------------------------------------------------------ MasterCard did not impose this deadline, says Randall Shuken, MasterCard senior vice president for e-business for the region. ----------------------------------------------------------- “This came directly in response from comment from senior executives at major banks,” he says. “We asked what dates they prefer, and they chose the most aggressive dates.” ----------------------------------------------------------- Criminals Are Mobile ----------------------------------------------------------- A uniform policy for the region can prevent card fraud from moving from countries that issue smart cards to neighbors that do not, Shuken says. “There will not be pockets of weakness letting fraud go from one country to another.” ----------------------------------------------------------- With Brazil’s move to chip under way and Mexico due to start by early 2002, Shuken says, the next wave will start by June 2002 and will include Venezuela, Colombia, Argentina and Chile. ----------------------------------------------------------- Those six markets represent 95% of MasterCard transaction volume in Latin America, Shuken says. ----------------------------------------------------------- For added security, bankers in Brazil, Mexico and Venezuela have decided to require that consumers enter personal identification numbers when they pay with chip-based credit or debit cards, Shuken says. He says bankers in Colombia, Argentina and Chile still are weighing the pros and cons of PINs, which require the addition of PIN pads to card-accepting terminals. ------------------------------------------------------------Besides cutting losses from stolen cards at retail stores, Shuken notes PINs can prevent fraudulent use of chip-based payment cards when the consumer is not face-to-face with a merchant, such as when paying over the Internet or via a mobile phone. ------------------------------------------------------------ But smart cards can do more than cut fraud, and MasterCard launched two new cards this summer with high-tech features meant to attract Internet-savvy young people. ----------------------------------------------------------- The Generation X program targets young adults. "In Latin America, they often live with their parents and have a lot of available income," says Marcelo Cardieri, MasterCard’s marketing director for product management for the Latin America and Caribbean. ----------------------------------------------------------- The chip carries a credit feature and an application that stores a cardholder’s Web site user IDs and passwords. Issuers can add a debit feature if they choose, and MasterCard will encourage banks to offer chip card readers for PCs. ----------------------------------------------------------- The Teen card is for teenagers, who normally do not qualify for credit cards. ----------------------------------------------------------- Parents and others can prepay money into an account, and the teen spends the funds by swiping the magnetic stripe on the card. The chip holds the Internet ID feature, and, potentially, other chip-based programs that cardholders will be able to download via the Internet. ----------------------------------------------------------- Both cards will feature eye-catching designs. The Teen card will be available in bright colors, while the Generation X card will offer translucent plastic in a variety of colors. ----------------------------------------------------------- Neither card has the conventional, rectangular shape of credit cards. ----------------------------------------------------------- The Gen X card has a rounded corner, while the more radical Teen card cuts a straight slice off of one corner. ----------------------------------------------------------- The cards will be introduced first in Brazil and Mexico, where the move to chip cards is furthest along, says Cardieri. The first programs are to be launched by late summer. ----------------------------------------------------------- For its part, Visa has not set deadlines for its Latin American members, but that does not mean it is any less committed to chip, says Mario Mello, Visa’s senior vice president of payment products for Latin America and the Caribbean. ------------------------------------------------------------ Visa has no regionwide mandates because fraud rates vary from one country to the next, Mello says. “In Brazil, fraud alone pays for more than 80% of the investment in chip,” he says. ------------------------------------------------------------ “In Argentina, a study last year showed fraud only paid for 20% of the investment. Why should Visa mandate to the Argentines just because Brazil has migrated, if there is no business case in the short term?” He notes a payment smart card costs issuers about $3, versus 30 cents for a mag-stripe card. ----------------------------------------------------------- Skimming Study ----------------------------------------------------------- Visa also is conducting a study of “skimming” in Peru, Venezuela, Colombia and Mexico that could help provide justification for the move to chip in those countries. Skimming refers to copying data from a mag-stripe card to make phony cards. ----------------------------------------------------------- It represents a major source of card fraud, and issuers typically are responsible for fraud losses on cards copied in this way. ----------------------------------------------------------- In Brazil, fraud topped $100 million in 1998, according to Visa figures cited by Zago, before declining by about 25% in 1999. ----------------------------------------------------------- Burned by those losses, Visa members have agreed that there will be no turning away from smart cards. For instance, Mello says, Visa members have agreed that all Visa-branded cards issued in Brazil will carry a chip. ----------------------------------------------------------- “If there is a Brazilian card, by 2003, they swipe the magnetic stripe, the point of sale terminal will reject the transaction,” he says. ----------------------------------------------------------- Terminals will accept magnetic-stripe cards issued outside of Brazil, he adds. ----------------------------------------------------------- Mello says Visa issuers have committed to converting 25 million Visa-branded credit and debit cards to smart cards within three years. ----------------------------------------------------------- Brazilian banks have issued more than 1 million EMV-compliant Visa smart cards so far, he says. ----------------------------------------------------------- The conversion of POS terminals also is well under way, Mello says. ----------------------------------------------------------- Some 150,000 POS terminals now accept EMV-compatible smart cards, with the rest of Visa’s 206,000 terminals scheduled for upgrade to chip by the end of the year. ----------------------------------------------------------- MasterCard has some 150,000 POS terminals in Brazil, and Shuken says terminals representing 80% of MasterCard volume in Brazil, including many of the largest, multilane retailers, accept smart cards. There are 13.8 million MasterCard-branded cards in Brazil, and 250,000 of them are chip cards. ------------------------------------------------------------ Brazil also is likely to be the first Latin American market to see American Express’ chip-based Blue card. AmEx introduced a mag-stripe version of Blue in Brazil in 1997, and similar cards last year in Chile and Argentina. ----------------------------------------------------------- An AmEx spokesperson says the chip-based Blue, whose features include online credentials, is not a good fit for some markets where Internet penetration is low. ----------------------------------------------------------- But Brazil, Latin America’s leader in Internet shopping as well as in smart cards, will see a chip-based Blue card this year, sources say. AmEx did not comment on its plans for Brazil, although a spokesperson says the move by Visa and MasterCard issuers to smart cards makes it easier for AmEx to move in the same direction. ------------------------------------------------------------ Mexico’s Test ------------------------------------------------------------ In Mexico, the seven major issuing banks have agreed on a smart card pilot in Toluca, a medium-sized state capital west of Mexico City. ----------------------------------------------------------- It was chosen because it is broadly representative of Mexico as a whole, and is not a tourism center where many transactions come from foreign cards. ----------------------------------------------------------- The banks will issue about 80,000 smart cards and place 800 chip card-ready POS terminals. ----------------------------------------------------------- While scheduled to begin in October, several bankers say the test is likely to be put off until early 2002 so as not to interfere with the busy Christmas shopping season. Even then, the test will not involve restaurants or major supermarkets. ------------------------------------------------------------ The pilot will allow banks to analyze all the changes they will need to make in customer service and processing systems as they convert to smart cards, says Fernando Diez Gutierrez Guzman, coordinator of smart cards, consumer credit and electronic banking at Banco Nacional de Mexico, or Banamex, which was recently acquired by New York-based Citigroup. ----------------------------------------------------------- He predicts major Mexican banks will convert their cards and POS terminals to smart cards in four to five years. ----------------------------------------------------------- There are some 90,000 POS terminals, 15,000 automated teller machines and 25 million debit and credit cards in Mexico. ----------------------------------------------------------- Mexican banks will move slowly because they must adapt many parts of their computer systems to handle smart card data, says Francisco Cacho Garcia, credit card director at Banco Serfin and former coordinator of a bankers association committee on smart card issues. ------------------------------------------------------------“We believe the process is rolling and there is no way of stopping it,” Cacho says. “But we are also aware that the rest of the organization within our banks has to have a digestion time.” ------------------------------------------------------------Meanwhile, at least one Mexican bank plans to use smart cards for more than just credit and debit applications. ------------------------------------------------------------ Banco Inbursa and Telmex, both owned by the Grupo Carso holding company, have been working for three years on a smart card project that officials say is ready for a large-scale rollout. ------------------------------------------------------------ Inbursa has licensed the Proton electronic purse technology for smart cards, and plans to issue 1 million chip cards that can store electronic money, says Juan Mesa, managing director of smart cards at Inbursa. -----------------------------------------------------------Those cards will be accepted at 250,000 Telmex phones that are being upgraded to accept smart cards. Cardholders also will be able to download new value onto their Proton cards at those phones. ------------------------------------------------------------ Mesa says 1,000 ATMs also will be equipped to accept chip cards by year’s end, as will some 20,000 kiosks where cardholders will be able to make Internet purchases with Proton and reload their e-purses. Inbursa also will seek to gain acceptance of Proton in transit, and at gasoline stations and retail shops. ----------------------------------------------------------- As part of the chip card rollout, Inbursa in June placed a $2.3 million order for 5,000 payment terminals from Brussels-based Intellect. ------------------------------------------------------------Proton vs. Mondex ----------------------------------------------------------- The Proton project creates a dilemma for Mexico as several of Inbursa’s competitors joined forces a few years ago to buy the Mexican franchise of Mondex, an electronic purse incompatible with Proton. ------------------------------------------------------------ Mondex issuance in Mexico has been limited to employee pilots. ------------------------------------------------------------ Mexican bankers will have to come to an agreement on a single purse, as they agreed on EMV, to avoid unnecessary costs building separate infrastructures, says Bancomer’s Zago. ----------------------------------------------------------- “As long as there are competing purses, nobody will make any money,” he says. ----------------------------------------------------------- While e-purse cards have been little-used in most other markets where they have been tried, those cards may be more appealing in Latin America, where many consumers have no bank accounts and thus mainly pay in cash. Bancomer’s Zago points out that 82% of Mexican consumer transactions are in cash, compared with 20% of payments by U.S. consumers. ----------------------------------------------------------- Besides the Proton project in Mexico, Mondex and Visa’s stored value brand, Visa Cash, have made some inroads in Latin America. ----------------------------------------------------------- But none of the systems has been rolled out on a national scale. ----------------------------------------------------------- Mondex appears to have made its greatest headway in Venezuela, where Banco de Venezuela and Grupo Santander this year issued more than 22,000 cards to students at two universities, Universidad Simon Bolivar and Universidad Católica Andrés Bello. Students use the cards at campus sandwich shops and vending machines, as well as to enter various facilities. ------------------------------------------------------------ Mondex Venezuela also has begun pilots with three additional banks, delivering 700 cards to employees for use at company cafeterias and vending machines, according to Arelys Pérez, CEO of Mondex Venezuela C.A. Visa says there are nearly 500,000 Visa Cash cards circulating in a half-dozen Latin American countries, including 350,000 cards in Brazil. ----------------------------------------------------------- Visa officials project there will be 20 million Visa Cash cards in use in Latin America by the end of 2002 as more Visa debit and credit issuers convert to chip cards in Brazil. ----------------------------------------------------------- A B2B Program ----------------------------------------------------------- One Peruvian bank is using smart cards to replace cash in business-to-business transactions. The Banco de Credito, Peru’s largest bank, has introduced a smart card for merchants located in remote regions, where spotty telephone service makes credit card authorizations unreliable, and cash payments made merchants and their suppliers inviting targets for robbers. ----------------------------------------------------------- “We required a type of card that could store information such as credit lines, balances, and movements and facilitate transactions in a secure manner through various distributors simultaneously,” says Ricardo Bustamante, head of systems division at the bank. “Smart cards were the solution.” ----------------------------------------------------------- Since 1996, the bank has issued its SmartCred smart card that allows companies to store up to 16 credit lines for payments to 35 suppliers. ----------------------------------------------------------- By the end of this year, the bank aims to have 50 merchants involved and the number of cardholders to almost double from 8,000 today to 15,000, says Ivana Osores, the bank’s head of business solutions. ----------------------------------------------------------- Several gasoline retailers in the region also issue smart cards to customers, offering rewards for using the card. Repsol YPF, a Madrid-based petroleum company, has issued 1.6 million smart cards to consumers, who accumulate bonus points when paying with the chip card, say officials at Gemplus, which supplies the cards. The company launched the card four years ago and recently stepped up its marketing with ads in newspapers and on radio and television. ------------------------------------------------------------ In Chile, petroleum company Copec moved its Tarjeta Copec Transporte from a magnetic-stripe to smart card for the program aimed at truck drivers. “With the magnetic stripe we had more problems–the card did not last very long,” says Angel Villegas, Copec’s credit card manager. He says chip cards are lasting three to four years, whereas customers were going through as many as four mag-stripe cards in a year. ----------------------------------------------------------- There are about 50,000 holders of the Copec card, which can be used to pay for gasoline, tracks when and where drivers refuel, and offers drivers such prizes as T-shirts, hats and radios for using the card. ----------------------------------------------------------- There are several mass transit smart card projects in the works, as well. Last year, Bogotá, Colombia, introduced smart cards for payments on city buses, and 1 million cards have been issued, according to Gemplus, the card supplier. ----------------------------------------------------------- Mexico City is gearing up for a potentially larger project. The city’s subway system, the Metro, will issue 300,000 smart cards this year to employees and to disabled riders, says Marcos Mercado Estrada, director of engineering and development. ----------------------------------------------------------- By next year, the subway hopes to have 1 million chip cards in use, he says. ----------------------------------------------------------- With 4.5 million daily riders, the subway card potentially could be carried by a large segment of Mexico City’s population, and Mercado says the transit operator hopes the cards will be used for more than just paying subway fares. ------------------------------------------------------------ The Metro’s cards will have both contactless and contact interfaces so that commuters can pay transit fares by waving the card near a radio-frequency device on a turnstile, while banks and merchants can accept the cards using terminals that require contact with the card’s chip. Mercado says Mexico City will use the same kind of contact/contactless card being rolled out in Paris by that city’s subway system operator,RATP. ------------------------------------------------------------ In Curitiba, Brazil, some 30,000 cardholders use combination contact/contactless smart cards for access to public buildings and at retail shops. ------------------------------------------------------------ Another 15,000 cards were to be issued this month as city buses planned to begin accepting the chip cards, say officials at Schlumberger, which supplies the cards. ------------------------------------------------------------ SIM Cards Arrive ------------------------------------------------------------ Latin America also will be using more of the subscriber identity module smart cards that sit inside mobile phones using the GSM standard common in Europe and much of Asia-Pacific. GSM phones represented only about 3% of Latin America’s 100 million cell phone users in early 2001, according to London-based research firm Ovum Ltd., but that will change. ------------------------------------------------------------ There already are GSM systems in Bolivia, Chile, the Dominican Republic, El Salvador, Peru and Venezuela, according to Ovum. ----------------------------------------------------------- GSM rollouts are expected in Mexico, Argentina and, eventually, Brazil. Schlumberger says Latin America will buy 2 million SIM cards this year, growing to 10 million by 2003. ------------------------------------------------------------Among the major SIM card buyers will be the Telcel unit of Telmex, which serves 11.7 of Mexico’s 16 million mobile phone subscribers, or 73%, according to Ovum. Telcel is switching to GSM as it transitions to the high-bandwidth, so-called “third generation” of cell phones. Telcel plans to launch GSM late this year and to switch entirely to GSM next year, say company officials. ----------------------------------------------------------- Each GSM phone requires a SIM card. ----------------------------------------------------------- Brazil awarded licenses for the construction of a national GSM network, and all the network operators in that country will make the move to GSM by 2006, says Cristiano Spillati, Ovum’s director of analysis for Latin America. By the end of 2006, there will be 82 million mobile phones in use in Brazil, all of them GSM, Spillati says. Other countries in the region also will switch to GSM as they move to the next generation of mobile phones. ----------------------------------------------------------- Despite smart card advances on several fronts, there remain obstacles, including cost. This is especially a barrier in countries suffering economic hard times, such as Argentina, where a recession has dragged on for three years and unemployment stands at 15%. ----------------------------------------------------------- Besides costing more than mag-stripe cards, smart cards require terminals that can read the chip. Shuken estimates it costs between $100 to $180 to upgrade a POS terminal to accept smart cards. The region also is a relative newcomer to payment cards, and many merchants have no POS terminals at all. ------------------------------------------------------------ Largely because of cost, says the Peruvian banker Bustamante, “Many financial institutions have taken a passive attitude and are waiting for the market to define a clear strategy before venturing into these types of initiatives.” ------------------------------------------------------------ In such an environment, banks and merchants can only invest in smart cards if they see a financial return. That is why any evidence that chip cards can cut into credit and debit card fraud will be crucial in moving Latin America toward a wider use of smart cards. ------------------------------------------------------------ [ Next Thread | Previous Thread | Next Message | Previous Message ] |