Maestro UK’s Roger Alexander explains to Stephen Timewell how, as e-commerce develops, banks can reposition themselves as authenticators via debit cards, and charge customers for the service.

The evolution of the credit card and the debit card have been decidedly different. The credit card began with Diners Club, American Express and Barclaycard decades ago as a delayed payment mechanism and has evolved through banks into Visa and MasterCard today.

The debit card model, however, arose out of the need to provide bank customers with cash at automated teller machines (ATMs). In the UK in the 1980s, for example, it was extended from access to cash to payments at the point of sale (PoS).

But while the ability to make money out of the credit card model with fees and high interest rates has not been in doubt, the issue of making money out of debit cards is seriously in question. Roger Alexander, chief executive of Maestro UK, which manages the Maestro card in the UK on behalf of the MasterCard organisation, believes that most people do not see the debit card as a product in its own right, rather they view it as part of the current account package offered to customers.

Mr Alexander acknowledges that since the debit card service has been “given away”, it would be very difficult to start charging for it now.

Providing added value

Nevertheless, Mr Alexander believes in “seeing the debit card in a different way”. By providing added value, he thinks that it is possible to charge for certain services and thereby provide a genuine revenue stream for institutions.

A revenue stream from the debit card could significantly change the mechanics of card operations and help to refocus banks’ core activities.

Mr Alexander contends that banks should reposition themselves on the payments value chain and take control of the authentication process – something that banks have failed to fully take under their wing. He says: “Debit is both an authentication driver as well as a payment device.”

In a world increasingly exposed to internet banking and e-commerce, Mr Alexander believes that the strategic importance of authentication should be recognised.

“It is vital that the bank or card issuer should take a proactive role in transactions through electronic channels to create a situation where the seller is provided with a guarantee of the authenticity of the buyer prior to the completion of the sale,” he says.

“Of equal importance is the protection of the buyer, ie, the authentication of the seller to ensure that they are who they say they are.”

The fear factor

With the growing fear of fraud, the rise of phishing and low consumer confidence in new channels, the full potential of e-commerce has not been reached.

“It is the very issues that have slowed down the development of the e-economy that provide banks with a window of opportunity to create the role of authentication intermediary. The advent of the e-economy, together with the threat from new competitors, provides the banks with an opportunity to optimise on customer relationships and act as a value-added intermediary to facilitate electronic trade,” explains Mr Alexander.

So what can be done? The advent of chip and pin through the EMV programme across Europe and various other countries, starting in January 2005, has provided an infrastructure whereby additional features such as a “dynamic password” can be used. Mr Alexander explains that Maestro, and Visa too, are working on a device, called a Cap (pictured), which will produce a dynamic number when the debit card is inserted in it.

This number will be specific to the individual transaction and will add another level of authentication. The process, which Maestro calls Dynamic Cardholder Verification, provides a one-off password. And although this token technology is not new – it is, in fact, an old device – it has been enabled by the advent of EMV.

Technology on trial

Mr Alexander explains that this technology is being trialled at present by banks that include Barclays, and the system “could be operational by the second half of 2005”. He adds that the key to implementation is agreement on standards between the major card organisations, MasterCard and Visa. An agreement is expected before the end of this year. The provision of standards should provide considerable impetus to greater usage.

What are the key advantages? For Mr Alexander, this process “creates a new role for banks”. Historically, banks have been the repository of valuables (such as deeds, information and jewellery) and have been viewed as a trusted third party. The e-economy provides similar opportunities for customers to deposit virtual valuables such as personal computer data and customer files.

The positioning of the card issuer as an authentication intermediary on the e-economy value chain should underpin a variety of activities. For example, playing a role in authentication in a complex transaction that involves the sale of a property and lawyers can not only speed up the transaction but also provide clear value. The card issuers can provide guarantees to retailers or sellers and others that will help to galvanise them into action. In turn, the virtual relationship with acquirers enables the card issuer to guarantee the credibility and integrity of the seller to the cardholder.

Change in role

As in the business-to-business area, where the continuous linked settlement (CLS) payment model has evolved, the authentication intermediary role is now being taken to the consumer space.

Mr Alexander firmly believes that this process, which provides a clear audit trail, can be used not only for transactions that involve lawyers, but also for relations with doctors online and for government-related payments.

The ability to correctly authenticate persons and act as a reliable third party is a valuable service that can then be legitimately charged for.

By looking at the debit card differently, Mr Alexander is confident that its possibilities can be leveraged; with the help of EMV, a useful revenue stream can be produced. Debit can make money.

Chip and pin: results of a UK trial

The UK Association of Payments Clearing Services (APACS) has released research indicating that the chip and PIN rollout will be largely successful in the UK. As of January 1, 2005, liability for card fraud will shift to retailers not equipped with chip and PIN at point of sale.

In May 2003, the UK rollout of chip and PIN point-of-sale (PoS) systems began as a three-month trial in Northampton.

A total of 200,000 cards were issued, reaching roughly half of the town’s adult population, 1000 retail outlets were equipped with chip and PIN readers at PoS, and 180 ATMs were equipped to deal with chip-enabled smart cards.

One year on and the scheme has proven highly successful, according to Jemma Smith, communications manager for APACS.

“Northampton was chosen as a place where people who live in the town shop in the town, giving lots of opportunities to find out how card-users were going to get on when they went out to shop… People are overwhelmingly positive; the majority of people get it intuitively that PIN is safer than using a signature.”

APACS’ own research indicates that three-quarters of adults in Northampton are now using chip-enabled cards (nationally the figure is approximately 50%) and 87% of these have used chip and PIN for transactions. The figures also show that two-thirds feel that their card transactions are now safer.

One concern – that the change in transaction procedure would lead to changes in customer payment methods – has apparently been proven unfounded.

Anecdotal evidence from retailers indicates no shift in behaviour, says Claude Slatner, chip and PIN implementation manager at APACS. “We asked retailers: ‘Are there any barriers to chip and PIN? Are you finding that [customers] prefer to use cash or cheques? Is there any change in payment methods?’ And nothing has been detected.”

However, Ms Smith notes: “Debit cards have been going out much more quickly than credit cards, and so the chances of somebody having a credit card with chip and PIN has been less up until now.”

This leaves a possible shift from usage of credit cards, where PINs are less well-known, to debit cards, where PINs are commonly used, open in the future.

By the end of the year, APACS has a target of 80 million chip and PIN cards in circulation, with 8 out of 10 cardholders having at least one chip and PIN-enabled card in the UK. “We are on track to meet the 2004 target,” says Ms Smith.


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