Rajiv Kapoor, Visa's executive vice president for products and marketing discusses the key drivers behind EMV migration.
While smart cards have been around in Asia Pacific for the past twenty years, it is only in the last few years that the business case for using smart cards has been developed. Driven by technology advances and fraud reduction, the banking industry has decided to focus on migrating from magnetic stripe to a chip-based environment for payments.
For us in the payments industry, the most important constituent in this move to smart cards is how to add value to the consumers.
Challenges facing the card payment business
In today’s competitive payment environment, it is becoming increasingly difficult to maintain the unique brand or customer advantage that companies used to have in the past. Every year, billions of solicitations go out to cardholders globally. Many card issuers face diminishing returns on profitability, as competition for cardholders continues to intensify. Increasingly, card issuers need to know how to enhance their value proposition, with more competitive product offerings and new technologies such as smart cards.
One of the major challenges is establishing an extensive infrastructure for smart cards, so that consumers can use them effectively. Last year, Visa and PriceWaterHouse-Coopers estimated that the cost of upgrading the current magnetic stripe cards and terminals to chip would range between two and a half and 5 billion dollars globally. While this cost of migrating the entire infrastructure is obviously massive, the business case for doing so was actually quite good.
How can smart cards improve profitability?
Smart cards can play an important role indeed to improve profitability. They add value to key profitability drivers such as card usage, customer retention and customer acquisition.
Even with over 300 million Visa cards in Asia Pacific, the most important factor for us is how to enhance card usage and spend. Smart cards can provide greater data availability such as loyalty programs for cardholders, encouraging greater card usage. There are already some very successful loyalty programs that work in the magnetic stripe environment such as airline programs, and these can be extended to chip-based cards. With the advent of e-commerce, smart cards can further facilitate the importance of security to a cardholder, such as with authentication. By adding valuable applications, smart cards bring benefits and encourage card spending that one would not see on magnetic stripe cards. The key profit factor for issuers is the volume that the loyalty program brings. Once consumers begin using their smart payment cards, the value proposition effect is multiplied.
Customer retention is an important driver for profitability, especially in saturated markets. With the ability to increase the number of applications and hence services such as loyalty on the same chip card, retention is better assured. In some markets, putting an application such as identification or access to insurance or health cards assures not only more cards, but also retention. In Hong Kong, Korea, Taiwan, the ability to extend the same payment card to be a mass transit card has reduced cardholder attrition.
New customer acquisition can be attained as smart cards provide the ability for issuers to offer more applications to cardholders because of increased storage capability. Today, smart cards already exist in one form or another in many sectors. Typically, these smart cards have single application such as credit or debit, healthcare, security, mass transit, stored value, loyalty or subscriber identification modules (SIM) in mobile communications. Payment and non-payment applications can now reside in the same chip on the card.
What’s driving chip adoption?
The demand for chip cards has been increasing exponentially. Today, there are two billion chip cards globally, about 30 percent of them are in Asia Pacific, and about 20% of the cards are payment-related cards. By 2004, that number will grow to four billion globally, with Asia Pacific carrying about 25 percent. Since the September 11 incident, many governments are considering to use chip cards for national identity, health or for medical insurance identification. The financial segment alone will account for about 15 percent.
There are several drivers for chip adoption. Fraud reduction is one of the major drivers for chip card migration. Chip uses enhanced security, and provides the next technological barrier to significantly reduce fraud. This is a long-term solution and that is why many countries such as Japan and Taiwan have already announced the chip migration at an industry level. Fraud will move from countries with high security standard to lower security barriers. That itself is a big cause to accelerate chip migration.
Secondly, the potential for value-added applications is driving chip adoption. Increased competition in established card payment markets is bringing a growing need for banks to differentiate their products and card offerings. Multi-application smart cards carrying a combination of payment and non-payment applications can provide additional cardholder value. A number of Visa members have already started issuing multi-application smart cards in Asia Pacific.
While the demand for smart cards have been exploding, the costs of producing them has been declining drastically. Three to five years ago, an EMV (Europay-Mastercard-Visa global chip specifications) chip card typically costs five to ten dollars to produce, depending on functionality. Today, a Visa smart card costs with a debit or credit payment function costs just below one US dollar. We have no doubts that when chip migration really gathers speed, these cost will continue to drop further.
Concerted efforts to reduce barriers to chip migration
Within the next ten years, all payment cards will contain a chip and will begin to carry multiple applications. As the industry leader, Visa has worked with our members to provide a coordination role to facilitate and accelerate the migration when the country or the membership of the country is ready to move. The European region was the first to move ahead with chip. In Asia Pacific, faced with the implication of rising fraud or demand for multiple applications, we are seeing a very strong move from magnetic stripe to chip cards.
In Asia Pacific, the payment industry is revolutionizing itself to move ahead, and chip migration is going to be a mainstream effort. Visa aims to complete 90 percent of migration of cards and terminals by end 2008. Recently, we have announced new policies and a US$25 million regional investment to accelerate the migration to EMV-standard smart cards. Regionally, Visa and its members will concentrate their initial investment and efforts in countries that have already started work on smart cards or expressed concerns about escalating fraud levels. Visa also makes sure that vendors in Asia Pacific are able to provide financial institutions with everything that they need for chip migration. We will ensure that there are resources and quality expertise so that chip migration process can be facilitated without any delay in this region.
Terminal costs are also declining. Today, the difference between a magnetic stripe terminal and a smart card terminal is below fifty dollars, and the price gap continues to narrow. Once terminals can be substituted with little or no incremental costs, chip migration will move mainstream. Visa has announced that from 2003 onwards, all newly installed terminals should be EMV chip terminals. From a business standpoint, this is indeed good news for the industry.
At a company level, it is up to the members to then decide how they want to move forward in the infrastructure, working with Visa. Our members have contributed funds to move the infrastructure in a quick manner and to overcome the barriers.
Rising multi-application payment capabilities
Payment is essentially at the heart of commerce. Visa’s vision of the future of payments is in universal commerce – the ability to pay anytime, anywhere over any device. Supporting that application, it is now possible to stack other standalone applications on the same chip platform. Multi-function smart cards can combine payment such as credit and debit with loyalty programs, stored value, Internet shopping, access, health, mobile telephony, insurance, transit and personal information features, compressing several cards into one.
How can these applications work together with the payment functionality? Visa has created the specifications for a smart card standard that is now known as GlobalPlatform. It comprises an open set of technologies that is now recognized across different industries, including the financial, telecommunication and government industries. Through that foundation, there is now global interoperability and one common platform for smart cards. That means that vendors from different parts of the globe can develop applications that can interact with one another on smart cards.
For example, if you were to issue a Visa card with a credit or debit application, you can still decide to add or remove loyalty programs after the card has been issued. With the GlobalPlatform, the card does not need to be recalled or reissued.
The concept of universal commerce is fast becoming a reality in Asia Pacific. Korea, one of the most technologically advanced markets in the world, has already issued a Visa smart card that allows a cardholder to make payment using their mobile phones. A joint development between Visa and SK Telecom, Korea’s largest telecommunication operator, the smart card enables the user to make payments and to download information via a slot in their mobile phones. The chip on the smart card carries a debit or credit application, Visa cash and a loyalty program.
Another implementation in Korea is Visa’s contact and contactless smart card, also known as the Visa combi card. Chosen by the Daejon City and Hana Bank as the payment card for multiple applications, including mass transit, the Visa combi card comes with a choice of Visa debit or credit function, Visa Cash and a stored value purse application. The dual interface capability allows fast transactions to be done in the contactless mode, as required in mass transit applications, and enables a cardholder to use the card for payments in conventional contact mode at traditional store-front merchants.
So there is a business case supported by the demand for multi-applications.
Maximize cardholder value
How do consumers perceive this new value brought by smart cards? Consumers don’t necessarily want to know the technology or mechanics behind the card, what interest them most is how do they benefit from it.
Card issuers therefore need to understand what their cardholders want. And in order to have the ability to have a market segmentation of one, issuers need to have tools that they can capture what consumer needs are. Smart cards provide the market opportunity to customize the offer. And through that, increases retention and greater profitability.
Last August, under the banner of Heart of Smart, Visa conducted a thorough research to understand how to enhance cardholder value and what consumers are looking for in a smart card. More than 1,000 consumers in five Asia Pacific markets – Australia, Hong Kong, Japan, Korea and Taiwan - were asked questions to determine the features and applications they would find most desirable on a smart card.
It was clear among consumers that there is a strong interest in smart cards as both a payment tool and useful lifestyle supplement. Nearly 80 percent of consumers surveyed in key markets in Asia Pacific say that smart cards will be an important part of their everyday life. Hong Kong and Taiwan scored the highest.
We also found out that consumers in Asia Pacific have clear-cut ideas about services that will add value to a chip card. More than two-thirds of consumers regard smart cards not merely as cards to carry out payment transactions, but also as lifestyle cards that consolidate key payment functions with personal information. Consumers wanted payment and non-payment applications that provide flexibility and convenience and security. Five non-payment applications stood out: medical insurance cards, identity cards, mass transit, loyalty and discounts.
Consumers’ desires for smart cards are driven by cultural and lifestyle norms, which vary across the region. The research tested six potential integrated cards, with lifestyle themes ranging from financial services, rewards, travel and entertainment, music and glamour. Consumers then ranked smart cards relative to their personal interests.
In the five key markets, the overall preferred theme among consumers is a smart card that caters to the needs of resort holidaymakers, strongly reflecting the travelling culture in Asia. The card could act as a "wallet" for cash, transportation tickets, phone card, hotel room key, rental car key and a loyalty card for various branded stores. Another 24 percent of cardholders across all markets would like a card that allows the user to track the value of his/her share portfolio, and make secure payments for share investment. In Hong Kong, consumers clearly preferred to have their smart cards with the option to track stocks online, trade and make investments with secure access.
The research provided insights into consumers’ evolving expectations and lifestyle demands and will be a valuable input when developing smart card products.
Knowing what cardholders want is the key for success. Today, smart card technologies are in place to help to meet new business challenges. Multiple application chip cards will play an increasingly important role, especially to increase the value to the consumer. Visa is ideally positioned to help our member banks leverage chip to maximize cardholder value. Our comprehensive framework and initiatives will help accelerate chip migration when our members are ready in each country. Members who embrace chip technology will be well positioned to capitalize the increasing number of new business opportunities that will arise.
