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Get Smart

Is it time to say goodbye to credit cards?

In the next decade, "smart" cards equipped with microprocessor chips will likely replace the magnetic-strip cards currently used as debit, credit and ID cards.

Smart cards have been available in Europe since the early 1980s; the cards' versatility and resistance to illegal use have finally caught the eye of U.S. credit card companies.

What features do smart cards have that magnetic-strip cards don't? For one thing, you can download and store large amounts of information on smart cards, making them perfect for programs like frequent flier clubs. Also, the information on the chip is encrypted, and the chip itself is embedded into the plastic card, making fraud difficult.

A program to test consumer acceptance of smart cards, sponsored by Visa USA, MasterCard, Citibank and Chase Manhattan Bank, is underway in New York City. Customers can download "cybercash" into their smart cards from ATMs and spend it at stores equipped with smart card readers.

So far, even with more than 500 stores in Manhattan equipped with smart-card technology, consumer response has been lackluster. Greg Jones, director of corporate relations at Visa, believes getting people used to the idea of smart cards may be a gradual process. "Smart cards are not a mainstay in people's wallets right now," says Jones, "but we expect that in five to 10 years' time, the cards will become far more prevalent [in the United States]."

Merchants who currently use magnetic-strip card readers will eventually have to replace them with those that can handle smart cards. On the upside, the new readers don't require a dedicated phone line--smart card readers can verify available funds, subtract the sales total, and inform the customer of the remaining balance from data stored on the card's microchip.

According to Schlumberger Electronic Transactions, a division of Schlumberger Ltd., a manufacturer of credit and smart cards, there were 13 million smart cards in use in North America in 1996. The firm projects that by 2005, more than 500 million smart cards will be circulating in North America.

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This article was originally published in the August 1998 print edition of Entrepreneur with the headline: Get Smart.

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