Consumer Quarterly
Vol.2, No.2
April 24, 1997

Smart Card, Smart Money?

Issuers of electronic cash substitutes such as smart cards hope that consumers will appreciate no longer having to dig for change for morning coffee, bus fare or a pay phone. Since smart card terminals operate off line, they can be easily installed in buses, taxis, pay phones and other convenient locations. As well, because users do not need to have a Personal Identification Number (PIN) to use their cards and no on-line authorization is required, transaction times are reduced to seconds - as fast or faster than paying with cash.

Card issuers envisage fee structures that could include a per-transaction charge, a "reloading" charge, or a flat fee. However, it is not yet clear whether convenience alone will induce large numbers of consumers to pay for yet another form of plastic. Furthermore, any gains in convenience must be balanced against the risk that these cards could be used in ways that impinge on personal privacy. Smart cards, like credit cards, could be used by marketers to track an individual's purchasing patterns without the consumer ever becoming aware of it.

Initially at least, the gains seem most substantial for merchants and card issuers. For example, the cost to retailers of handling cash is estimated to be between 4% and 7% of sales. This figure may run as high as 15% for merchants, such as transit authorities, that routinely deal with large numbers of small-value payments. For these organizations, smart cards could offer significant savings. For card issuers such as banks, having cash value registered on cards rather than actual cash leaving the vaults in customers' pockets means funds can earn interest for the institution longer. With small-value transactions, at an estimated $75 billion per year in Canada, the potential amount of interest that could be earned on this smart-card "float" is very large.

Protecting Debit Card Users

In 1992, before paying by debit card was possible in most of Canada, a working group of card issuers, retailers and government and consumer organizations developed a voluntary code of practice to protect consumers. The code requires issuers to provide consumers with information, establishes card issuer and consumer responsibilities for security, attributes liability in the event of transaction problems or unauthorized use, and allows for complaint-handling and dispute resolution.

Last year, Industry Canada, in cooperation with the working group, commissioned a Toronto research firm to evaluate industry adherence to the code. The researchers looked at industry policies and procedures, cardholder agreements and customer information documents, conducted a telephone survey of cardholders, and reviewed consumer complaints to federal and provincial government agencies. Investigators also posed as customers at financial institution branches, and tested ATMs and retail point-of-sale terminals.

The study found that financial institutions' policies generally adhere to the code of practice. However, it noted a number of areas for improvement, both in industry practices and in the clarity of the code itself. One of the more significant problems was that financial institutions were not always providing enough information on PIN security at their branches. In some cases, branches did not meet the standards established in their own policies.

The researchers also noted a lack of privacy at point-of-sale terminals. In some retail outlets, customers could be observed entering their PINs, which provided opportunity for thieves and the potential for losses by unwary consumers.

The working group will meet shortly to plan rapid action to upgrade consumer PIN security information and to improve privacy at point-of-sale terminals. They will also begin work on eliminating ambiguity from the code's wording.

Copyright © 1997 by Industry Canada, Office of Consumer Affairs. All Rights Reserved. Reprinted with permission.