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Card Industry Overview


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Card Industry Overview

  1. 1. Overview Of Card Industry Technology To Loyalty
  2. 2. <ul><li>Commerce has become a technical issue. It is not only about making a financial transaction, it is about having a relationship with the consumer while they are exchanging currency for goods and services. </li></ul>A Thought
  3. 3. Insight <ul><li>Kim Resch </li></ul><ul><ul><li>Extensive Experience in Debit, Credit, and Smart Cards, Mobile Commerce, Loyalty and Incentives. </li></ul></ul><ul><ul><li>Practical Experience in new product launches including Amex Blue and smart Visa. </li></ul></ul><ul><ul><li>Specializes in project strategy, project management, implementations, and training in the emerging areas of commerce. </li></ul></ul><ul><li>Dave Carrithers </li></ul><ul><ul><li>20 years experience in semiconductor, chemicals, consumer products, incentives, stored-value & debit cards, etc. </li></ul></ul><ul><ul><li>Marketing, IT, Sales, NBD, operations </li></ul></ul><ul><ul><li>Focus on product, business & market development </li></ul></ul>
  4. 4. A Little Laugh
  5. 5. Objectives Of Today <ul><li>History of the card industry </li></ul><ul><li>Review the different types of cards and payment types available in the market </li></ul><ul><li>Insight into how card products are processed & the players </li></ul><ul><li>Review of the loyalty card industry </li></ul><ul><li>How & where the money is made in the industry </li></ul><ul><li>Review of the credit card & airline loyalty programs </li></ul><ul><li>Review of the smart card </li></ul><ul><li>Trends in the world of cards & payments </li></ul><ul><li>Opportunities </li></ul>
  6. 6. History Of Payment Cards <ul><li>1914 - Western Union provided metal cards giving free, deferred-payment privileges to preferred customers. These cards came to be called &quot;metal money.“ </li></ul><ul><li>1924 - General Petroleum Corporation issued the first metal money for gasoline and automotive services first to employees and select customers and later to the general public. </li></ul><ul><li>Late 1930's - American Telephone and Telegraph (AT&T) introduced the &quot;Bell System Credit Card.&quot; Soon, railroads and airlines introduced similar cards. Credit cards grew in popularity until the beginning of World War II when &quot;Regulation W&quot; restricted the use of such cards during the war and temporarily suppressed the growth of this new payment alternative. </li></ul>
  7. 7. History Of Payment Cards <ul><li>1946 - A New York banker developed a credit system called Charge-It. When customers charged local retail purchases, the merchant deposited the charges at Biggins Bank and the bank reimbursed the merchant for the sale. The bank later collected payment from the customer. </li></ul><ul><li>1950 - Mr. McNamara created Diners Club charge card. </li></ul><ul><li>1951 - Customers of New York's Franklin National Bank submitted an application for a loan and were screened for credit. Approved customers were given a card they could use to make retail purchases. The merchant copied the customer information from the card onto a sales slip, called the bank for approval of transactions over a certain amount. The bank would credit the merchant account for the loan minus a fee to cover the costs of providing the loan. </li></ul>
  8. 8. History Of Payment Cards <ul><li>1959 - Many banks were offering the option of revolving credit, which allowed customers to make regular payments on the balance owed rather than having to pay off the entire balance at one time. </li></ul><ul><li>1965 - Bankcard associations began when Bank of America formed licensing agreements with other banks. This enabled them to issue BankAmericard and Interchange transactions among participating banks. </li></ul><ul><li>1966 - Fourteen US banks formed Interlink, a new association with the ability to exchange information on credit card transactions. </li></ul>
  9. 9. History Of Payment Cards <ul><li>1967 - Four California banks formed the Western States Bankcard Association and introduced the MasterCharge program to compete with the BankAmericard program. </li></ul><ul><li>1967 - Jürgen Dethloff invents the smart card computer. </li></ul><ul><li>1969 - As the bankcard industry grew, banks interested in issuing cards became members of either BankAmericard or MasterCharge. Their members shared card program costs, making the bankcard program available to even small financial institutions. </li></ul><ul><li>1970 - As credit card processing became more complicated, outside service companies began to sell processing services to VISA and MasterCard association members. This reduced the cost of programs for Issuing Banks and Acquirers and increased the size of the bankcard industry. </li></ul>
  10. 10. History Of Payment Cards <ul><li>1970 / 1971 - MasterCharge and BankAmericard developed rules and standardized procedures for handling the bankcard paper flow in order to reduce fraud and misuse of cards. The two associations also created international processing systems to handle the exchange of money and information and established an arbitration procedure to settle disputes between members. </li></ul><ul><li>1976 - A pre-paid phone card was introduced by the Italian national phone company SIP. The introduction of the phone card was brought about by an extreme shortage of coins in the country which led to a rash of payphone thefts. The Italian phone card used a magnetic stripe, similar to those found on credit cards, and required the use of a payphone specially equipped with a magnetic card reader. </li></ul>
  11. 11. History Of Payment Cards <ul><li>1977 - BankAmericard became VISA. </li></ul><ul><li>1979 - MasterCharge changed its name to MasterCard. </li></ul><ul><li>1982 - Japan's Nippon Telephone and Telegraph introduced the first Japanese pre-paid phone card to make calling more convenient for the tens of thousands of daily subway riders in Osaka and Tokyo. Like its European counterparts, the Japanese pre-paid cards relied on a magnetic strip and specially equipped telephones. </li></ul><ul><li>1993/1994 - Experimental card operating system at the University of Karlsruhe. It was mainly intended to implement and compare a family of public key crypto protocols worked on at the European Institute of System Security. Hence the name of the card was &quot;ICEcard&quot; (Ic card for Cryptographic Experiments). </li></ul>
  12. 12. History Of Payment Cards <ul><li>1990 New York's RBOC, Nynex released the first pre-paid calling card that used PIN authorization instead of the magnetic stripe. Nynex's card permitted the cardholder to dial an 800 number and enter his PIN to make long distance phone calls. </li></ul><ul><li>1993 – First bank debit card/ checking card issued. </li></ul><ul><li>1994 - MAOSCO and Keycorp create programmable smart cards. </li></ul><ul><li>1995 – Selective Use Debit Card Issued – Exclusively Yours Card. </li></ul><ul><li>1995 – First Stored-Value card issued – Your Choice Card. </li></ul><ul><li>1996 – Visa Cash Stored-Value Launched. </li></ul>
  13. 13. Card Industry Landscape The Why! The Players! The Program Specifics! The How!
  14. 14. Definition of Terms <ul><li>Card Associations: Both VISA and MasterCard are not for-profit organizations who both issue credit cards and set and maintain the rules for processing. They are both run by board members who are mostly high-level executives from their member banks. </li></ul><ul><li>Issuing and Acquiring Banks: An issuing bank is the original bank that issues the card, such as a First USA Visa card. The acquiring bank is the bank set up by the merchant to accept transaction processing for cards accepted. </li></ul><ul><li>Authorization Request and Response: An electronic request for authorization sent to an Issuer by a merchant or Acquirer. The response can approve, decline or route the transaction. </li></ul><ul><li>Authentication: A cryptographic process that validates the identity and integrity of data used in smart cards. </li></ul><ul><li>Smart Card/Chip Card: A plastic card embedded with an integrated circuit, or chip, that communicates information to a interface device. Chip cards offer increased functionality through the combination of significant computing power and data storage. Chip cards are capable of holding multiple applications and sometimes are referred to as Multi-Ap Cards. </li></ul>
  15. 15. Definition of Terms <ul><li>Online Authorization: A method of requesting an authorization through a data communications network other than voice to an Issuer, an authorizing processor, or stand-in processing. </li></ul><ul><li>Offline Authorization: A method of processing a transaction between the card and terminal at the point of transaction without sending the transaction online to the Issuer for authorization. Transactions are sent in batch format to the processing systems. </li></ul><ul><li>Processor: A vendor acting as the agent to a bank that provides authorization, clearing, or settlement services for merchants and banks. </li></ul><ul><li>Host Systems: A computer system used by an Issuer, Acquirer, Merchant, Client or Vendor to perform in-house processing. </li></ul><ul><li>Interchange: The fees merchants pay to the card associations or companies on the transactions, usually a % of the sale price. </li></ul>
  16. 16. Card Industry Landscape The Why! The Players The Programs Specifics The How! Psychology of a card program Cardholder Corporate Sponsor Merchant / POI Access Device (Card, Transponder, Terminals ….) Rewards (Points, coupons…) Program (Loyalty supplier, database, rules) Collateral (setup, statements, printed materials) Technology (Systems, processing, hardware, firmware, Issuing) Banks Issuing and Acquiring Processor
  17. 17. Transaction Breakdown * Represents e-coins/e payment services, direct deposit 0% 70% 30% 0% Catalog/ Phone 5% 95% 0% 0% Web 0% 30% 10% 60% In Store eCurrencies* Card Check Cash
  18. 18. Card Facts <ul><li>2000 - MasterCard's 20,000 member institutions had issued over 437 million branded cards world wide, 15.4 percent more than the previous year. The number of cards issued in the US reached 235.1 million in 2000, 16 percent above the 1999 level. </li></ul><ul><li>MasterCard association generated $857 billion in gross dollar volume (GDV), which includes both purchase activity and cash transactions, representing a 21.5 percent increase on 1999. In the fourth quarter of 2000, GDV rose 19 percent to $231 billion. In the US, full year GDV registered its highest growth rate in six years having risen 20.2 percent to $423 billion. </li></ul><ul><li>MasterCard has 21 million acceptance locations worldwide, a 12.7 percent increase on 2000. </li></ul><ul><li>1998 - Visa had issued 655 million cards, generating sales volume of $ 1,4 trillion and was accessible at 488,585 ATMs. </li></ul>
  19. 19. Card Facts <ul><li>Affinity Cards </li></ul><ul><li>MBNA Corp. The Wilmington, Delaware-based issuer issues cards for 4,000 groups, ranging from virtually every college and university in the US to the International Bridge Club. The company's 2000 annual report says its average account balance was USD $3,519, compared with the industry average of USD $2,311. The average transaction value for MBNA customers was USD $129, compared with the industry's USD $99. </li></ul><ul><li>First USA has more than 2,000 partnership programs, including relationships with America Online Inc., Microsoft Corp., and Yahoo! Inc. </li></ul><ul><li>According to association estimates, about 40 to 50 percent of cards issued worldwide are multibranded (either a co- branded, affinity, or loyalty card), a level that some say is the saturation point for the market. </li></ul>
  20. 20. Card Facts <ul><li>Affinity Cards </li></ul><ul><li>MasterCard has more than 12,000 co-branded and affinity programs worldwide. Visa has about 9,000 multibranded programs worldwide. About 20 percent of its US card base is co-branded or affinity. </li></ul><ul><li>Auto and airlines cards each account for 23 percent of the co-brand card market, followed by retail cards at 19 percent, according to Visa and MasterCard figures. </li></ul>
  21. 21. How Money Is Made <ul><li>MasterCard & Visa are not-for-profit associations, which support member banks, which share a common network </li></ul><ul><li>American Express & Discover Card are, for-profit companies and own their own networks </li></ul><ul><li>All card associations and companies charge an interchange fee to the merchants that offer their cards </li></ul><ul><ul><li>Ranges: </li></ul></ul><ul><ul><li>MasterCard & Visa 1.2% to 3% </li></ul></ul><ul><ul><li>AMEX 2.5% to 5% </li></ul></ul><ul><ul><li>Discover Card 1.2% to 4% </li></ul></ul><ul><li>MC & Visa issuing banks get a cut of the interchange (between .03% and 1% based on size of issuing volume) </li></ul><ul><li>Acquiring Banks get a cut of the interchange fee, plus sometimes a processing fee (between .002% and 1%) </li></ul>
  22. 22. How Money Is Made <ul><li>Processors charge a fee to handle transaction bundling and data reporting, etc. Range between 1 cent to 25 cents per transaction </li></ul><ul><li>Card issuers charge consumers a fee to have a card, ranging from $25 a year to $300 a year </li></ul><ul><li>Purchase cards charge yearly fees on reporting and filtering support (range from $50,000 to $200,000 a year) </li></ul><ul><li>Cost per card, by card manufactures range from 10 cents to $5 dollars based on the type of card (i.e. smart card) </li></ul><ul><li>Breakage & float </li></ul>
  23. 23. Types Of Cards <ul><li>Charge Cards </li></ul><ul><ul><li>American Express </li></ul></ul><ul><ul><li>Retail Store/Private Label </li></ul></ul><ul><li>Credit Cards </li></ul><ul><ul><li>Visa/ MasterCard </li></ul></ul><ul><li>Secured Credit Cards </li></ul><ul><li>Purchase/ Procurement Cards </li></ul><ul><li>Debit/ Check Cards </li></ul><ul><li>Stored-Value Cards </li></ul><ul><ul><li>Gift Cards </li></ul></ul><ul><ul><li>Phone Cards </li></ul></ul><ul><li>Membership & Other Cards </li></ul><ul><li>Smart Cards </li></ul>
  24. 24. Types Of Card - Charge <ul><li>Charge Cards </li></ul><ul><ul><li>American Express </li></ul></ul><ul><ul><li>Retail Store & Gas Cards </li></ul></ul><ul><li>Interesting Points </li></ul><ul><ul><li>No line of credit – must be paid off each month </li></ul></ul><ul><ul><li>Heavy penalties for late payment </li></ul></ul><ul><ul><li>In the past most retail stores offered one </li></ul></ul><ul><ul><li>Profitable for the stores </li></ul></ul><ul><ul><li>Single retailer version limited use </li></ul></ul><ul><ul><li>Service & extended warranty sales opportunities </li></ul></ul>
  25. 25. Types Of Card – Credit Cards <ul><li>Credit Cards </li></ul><ul><ul><li>Visa/ MasterCard </li></ul></ul><ul><ul><li>Affinity Cards </li></ul></ul><ul><ul><li>Airline Cards </li></ul></ul><ul><li>Interesting Points </li></ul><ul><ul><li>Limited in what can be done </li></ul></ul><ul><ul><li>Payment pretty straight forward </li></ul></ul><ul><ul><li>Requires credit check & approval </li></ul></ul><ul><ul><li>Market seems to be at saturation point </li></ul></ul><ul><ul><li>Operates on an open platform </li></ul></ul>
  26. 26. Types Of Card - Secured <ul><li>Secured Credit Cards </li></ul><ul><ul><li>Target market is credit consumers </li></ul></ul><ul><ul><li>Requires a deposit of between $500 and $2,000 </li></ul></ul><ul><ul><li>Monthly payment is required otherwise draw down on deposit and high penalty </li></ul></ul><ul><ul><li>Requires high maintenance and yearly fees </li></ul></ul><ul><ul><li>Operates on an open platform with some level of authorizations </li></ul></ul>
  27. 27. Credit/Debit Online Transaction Processing Legacy Hosts Visa or MC systems Processor -Merchant accepts card -Validates card by signature check or PIN -Processes transaction -Consumer’s bank approves transaction, sends back to merchant -Settlement will post to statement. -Merchant’s bank initiates transaction -Routes to locations determined by card ids for approval and processing -Collects card ID/number, Merchant ID, Amount. Request Auth Settlement Request Auth Settlement
  28. 28. Types Of Card - Purchase <ul><li>Purchase/ Procurement Cards </li></ul><ul><ul><li>Allows for filtering/selective use via SIC codes (i.e. hotels, fuel, etc.) </li></ul></ul><ul><ul><li>Spending limits (daily, weekly, monthly, by category) </li></ul></ul><ul><ul><li>Intense reporting & tracking </li></ul></ul><ul><ul><li>Main target B2B & corporate travel </li></ul></ul><ul><ul><li>Operate on an open platform, with some level of tabling/filtering </li></ul></ul>
  29. 29. Purchase/Procurement Card Transaction Processing SIC Filtering Visa or MC systems Processor -Merchant accepts card -Validates card by signature check or PIN -Processes transaction -Merchant;s bank initiates transaction -Processes against SIC filter -Routes to appropriate locations -Processes transaction -Approves or Declines transaction -Posts to statements on settlement Request Auth Settlement Request Auth Settlement
  30. 30. Types Of Card – Debit/Check <ul><li>Debit/ Check Cards </li></ul><ul><ul><li>Started out as ATM only card </li></ul></ul><ul><ul><li>Requires a pin </li></ul></ul><ul><ul><li>Access to a bank/ checking account (continual deposits) </li></ul></ul><ul><ul><li>No credit line (instead an overdraft line) </li></ul></ul><ul><ul><li>Concern by retailers on fees </li></ul></ul><ul><ul><li>Runs on bank transaction networks (Interlink and Maestro) </li></ul></ul><ul><ul><li>Networks originally designed for banks to share information </li></ul></ul><ul><ul><li>Operates on an open and/or closed platform with security </li></ul></ul><ul><ul><li>Filtered (selective use) and open available </li></ul></ul>
  31. 31. Debit Offline Transaction Processing Legacy Hosts Visa or MC systems Processor Batch Request Auth and Settlement Settlement Request Settlement -Merchant accepts card -Validates card with PIN -Processes transaction -Collects batch data and formats clearing transaction -Approves or Declines transaction -Routes to appropriate locations -Processes transaction -Posts to statements Auth and Settlement
  32. 32. Types Of Card – Stored Value <ul><li>Stored-Value Cards </li></ul><ul><ul><li>Gift Cards </li></ul></ul><ul><ul><li>Phone Cards </li></ul></ul><ul><ul><li>Mall Cards </li></ul></ul><ul><ul><li>Gas Cards </li></ul></ul><ul><li>Interesting Points </li></ul><ul><ul><li>Open and Filtered (selective use) from one store, to a chain, to a mall </li></ul></ul><ul><ul><li>Funds are pre-loaded on the card – most once spent are disposable </li></ul></ul><ul><ul><li>Most are anonymous </li></ul></ul><ul><ul><li>Most operate on a closed platform </li></ul></ul>
  33. 33. Stored Value Transaction Processing -Cards are preloaded with points. -Merchant requests transaction -Verifies Card Legacy Hosts/filters Visa or MC systems Processor Request Auth Settlement Request Auth Settlement -Transaction processes like Debit -Card is validated against stored value hosts or filtering -Processes transaction -Posts to statements
  34. 34. Types Of Card - Other <ul><li>Membership & Other Cards </li></ul><ul><ul><li>Most likely no payment involved </li></ul></ul><ul><ul><li>Account &/or membership ID / number </li></ul></ul><ul><ul><li>Discounts / punch cards </li></ul></ul><ul><ul><li>Special access/ areas </li></ul></ul><ul><ul><li>Purchase or activity tracking </li></ul></ul><ul><ul><li>Magnetic strip &/or bar code </li></ul></ul><ul><ul><li>More about belonging to a club/group </li></ul></ul><ul><ul><li>Operates on a closed platform </li></ul></ul><ul><ul><li>Loyalty & frequency tracking </li></ul></ul>
  35. 35. Membership Card Transaction Processing -Card is accepted -Checked against internal database -Can be routed to third-party database through processor. Internal Database Processor 3 rd party Database Example: Blockbuster Example: Dining Ala Carte
  36. 36. Types Of Card – Smart <ul><li>Smart Cards </li></ul><ul><ul><li>Multi functional (debit, stored-value, credit) </li></ul></ul><ul><ul><li>Simple cards to very complex (based on chip type) </li></ul></ul><ul><ul><li>High security & fraud protection </li></ul></ul><ul><ul><li>Requires special reader </li></ul></ul><ul><ul><li>Contact & contactless technologies </li></ul></ul><ul><ul><li>Operates on closed and open platforms </li></ul></ul><ul><ul><li>Can have multiple currencies (i.e. cash, points, etc.) </li></ul></ul>
  37. 37. Smart Card Transaction Processing -Card and Terminals authenticated with cryptograms -Obtain PIN, if needed -Verifies static data on chip -Processes static programs offline -Sends transaction online -Routes to any internal legacies -Verifies risk parameters on card Legacy Hosts Visa or MC systems Processor Online Request Auth Settlement Online Request Auth Settlement -Validates card and transaction data -Routes to hosts systems -Processes settlement -Posts to statements -Formats the crypto authentication request -Routes and initiate online transactions.
  38. 38. Smart Card Overview Electronic Ticketing & Automated Air Travel Processes Special Offers and Loyalty Programs Automated Car Rental Processes E-Purse Enhanced Customer Information Corporate Security Automated Lodging Processes POS / Merchant's Logical & Physical Access Voucher Replacement Target Marketing and Expandable to other Locations Mobile Commerce <ul><li>Smart Card: 101 </li></ul><ul><li>The Market </li></ul><ul><li>Smart Cards in Loyalty </li></ul><ul><li>Lessons Learned </li></ul>
  39. 39. History of Smart Cards <ul><li>Smart Cards have been around since the early 70’s. The patent was registered in 1974. </li></ul><ul><li>Commercialization started in the early 1980’s with phone cards. </li></ul><ul><li>In 1993, there were 300 million Smart Cards issued in the world. (80% were phone cards) </li></ul><ul><li>In 1998, Amex Blue was introduced in US. </li></ul><ul><li>In 2000, vendors shipped 1.6 billion chip cards worldwide, of which 541 million were cards with microprocessor chips, up 36% from the year before. </li></ul><ul><li>In 2005, vendors will ship an estimated 2.4 billion of the higher-end microprocessor cards, half of which will be subscriber identity module cards for mobile phones </li></ul>
  40. 40. What is a Smart Card? <ul><li>A smart card resembles a credit card in size and shape, but inside it is completely different </li></ul><ul><li>A silicon chip beneath a contact plate </li></ul><ul><li>The silicon chip is a small computer with 8-64bit microprocessor </li></ul><ul><li>It has the same processing speeds as old computers, such as Tandy </li></ul>
  41. 41. Smart Card at a Glance! 1234 5678 9012 3456 Joe Smith Silicon Operating System (MULTOS, JAVA, Windows) Applications EMV Loyalty Wallet Misc. Appl. Contact Plate
  42. 42. Why Smart Cards? <ul><li>Security and fraud reduction </li></ul><ul><li>Interactive </li></ul><ul><li>Storage Capacity </li></ul><ul><li>Dynamic downloading </li></ul><ul><li>Side Note: Outside the U.S., Smart Card use has aggressively taken place because of two major factors: </li></ul><ul><ul><ul><li>Telecommunications is very poor & costly </li></ul></ul></ul><ul><ul><ul><li>Majority of transactions are offline </li></ul></ul></ul>
  43. 43. Types of Smart Cards <ul><li>Memory Card: No processing capability </li></ul><ul><li>Contact </li></ul><ul><li>Contactless (Proximity): Using Radio Frequency </li></ul><ul><li>Combi-Card </li></ul><ul><li>Transponders or Key Fob </li></ul><ul><li>Operating Systems </li></ul><ul><li>Java Card </li></ul><ul><li>Multos </li></ul><ul><li>Microsoft Windows for Smart Cards </li></ul>
  44. 44. Fraud and Security <ul><li>Magnetic stripe technology remains in wide use in the U.S. However, the data on the stripe can easily be read, written, deleted or changed with off-the-shelf equipment. </li></ul><ul><li>To protect the consumer, businesses in the U.S. have invested in extensive online mainframe-based computer networks for verification and processing. </li></ul><ul><li>The microprocessor on the smart card is there for security. The host computer and card reader actually &quot;talk&quot; to the microprocessor. The microprocessor enforces access to the data on the card. </li></ul>
  45. 45. Fraud and Security <ul><li>Smart cards are protected with a public/private key infrastructure: </li></ul><ul><ul><li>Digital Signatures </li></ul></ul><ul><ul><li>Cryptography to perform: </li></ul></ul><ul><ul><ul><li>Data Integrity </li></ul></ul></ul><ul><ul><ul><li>Authentication </li></ul></ul></ul><ul><ul><ul><li>Non-repudiation </li></ul></ul></ul><ul><ul><ul><li>Confidentiality </li></ul></ul></ul>
  46. 46. Why are Smart Cards Safer? <ul><li>Built in interactive capabilities </li></ul><ul><li>Personalized cryptography </li></ul><ul><li>Tamper resistant, cannot be reproduced </li></ul><ul><li>Creates card present environment </li></ul><ul><li>Individual risk parameters </li></ul><ul><li>Note: Security directly contributes to price. </li></ul>
  47. 47. Standardization <ul><li>EMV (Europay, MasterCard and Visa) </li></ul><ul><ul><li>Card specifications </li></ul></ul><ul><ul><li>Terminal specificities </li></ul></ul><ul><ul><li>Application specifications </li></ul></ul><ul><li>Cross-border concerns </li></ul><ul><li>How are they doing so far? </li></ul>
  48. 48. Common Uses of Smart Cards <ul><li>The most common smart card applications are: </li></ul><ul><li>Credit cards </li></ul><ul><li>Electronic cash </li></ul><ul><li>Computer security systems </li></ul><ul><li>Wireless communication </li></ul><ul><li>Loyalty systems, like frequent flyer points </li></ul><ul><li>Banking </li></ul><ul><li>Satellite TV </li></ul><ul><li>Government identification </li></ul>
  49. 49. Common Applications <ul><li>Loyalty : Multiple programs, tickets, points, coupons, one-to-one. </li></ul><ul><li>Network Access : secure email, secure sign-on, web access. </li></ul><ul><li>Payment: Secure transactions, multiple accounts. </li></ul><ul><li>Travel: reusable tickets, virtual ticketing, links to payment applications and software, Automated check-in, reduced fraud. </li></ul>
  50. 50. Smart Cards In Other Countries <ul><li>Smart cards are much more popular in Europe than in the U.S. </li></ul><ul><li>In Europe the health insurance and banking industries use smart cards extensively. Every German citizen has a smart card for health insurance. </li></ul><ul><li>Even though smart cards have been around in their modern form for at least a decade, they are just starting to take off in the U.S. </li></ul>
  51. 51. Where The Smart Card Market Is Headed! <ul><li>Card issuers want chip card to reduce fraud. </li></ul><ul><li>Anticipates multi-aps will attract cardholders and transactions. </li></ul><ul><li>Chip Manufacturer and Hardware Suppliers are showing losses </li></ul><ul><li>Readers are not being adopted….even when free. </li></ul><ul><li>Keyboards are progressing. </li></ul><ul><li>Merchant migration is happening. </li></ul><ul><li>Gimmicks are more successful than functions (i.e.. Blue, Clear) </li></ul><ul><li>Internet transactions are “seeming” more secure. </li></ul>
  52. 52. The Current State of the Market American Express <ul><li>Launched “Blue” September of 1999. Now with over 2 million cards. </li></ul><ul><li>Applications: Secure Access, Wallet, Reader, BlueLoot </li></ul><ul><li>Rolling out to multiple countries, Business, Student. </li></ul><ul><li>Decommissioned Wallet </li></ul><ul><li>Focusing on palm computing and mobile. </li></ul>
  53. 53. The Current State of the Market Visa USA <ul><li>Visa USA Launched “smart Visa” September 2000 </li></ul><ul><li>Over 3 million cards with Providian, First USA and Fleet. </li></ul><ul><li>Applications: Payment, Access, Loyalty, Reader. </li></ul><ul><li>Launched Target POS (Providian made first transaction). </li></ul><ul><li>Hypercom, Vital and National City teaming up for POS </li></ul><ul><li>Pushing Loyalty as driver for merchant </li></ul>
  54. 54. The Current State of the Market MasterCard <ul><li>Citibank planned September 2001 launch of 4m cards </li></ul><ul><li>Applications: e-cash, loyalty, e-ticketing </li></ul><ul><li>Strong alliances, yet Multos-based. </li></ul>
  55. 55. Loyalty and Smart Cards <ul><li>Multi-ap functions are prime for loyalty, yet difficult to please the whole market. </li></ul><ul><li>Closed environments are good examples and ripe for loyalty. </li></ul><ul><li>Will supply more security. </li></ul><ul><li>Market will not advance without merchant. </li></ul><ul><li>Have not proved usable functions are more superior than mag stripe. </li></ul><ul><li>What the industry is looking for is a “gift card on steroids.” </li></ul>
  56. 56. Opportunities for Loyalty <ul><li>Relationship management on the card </li></ul><ul><li>Multiple earning and redeeming </li></ul><ul><li>Individualized information and preferences </li></ul><ul><li>Points and programs held locally on card </li></ul><ul><li>Info storage capacity </li></ul><ul><li>Links to databases </li></ul>
  57. 57. Obstacles In Adoption <ul><li>Infrastructure </li></ul><ul><li>Ease and convenience with Mag. Stripe </li></ul><ul><li>Cost of card and conversion </li></ul><ul><li>Retailer ROI </li></ul><ul><li>Cardholder confidentiality </li></ul><ul><li>Standardization </li></ul>
  58. 58. Lessons Learned <ul><li>Version and program control </li></ul><ul><li>Application segregation </li></ul><ul><li>Transaction processing changes </li></ul><ul><li>Card/program expiration dates </li></ul><ul><li>Replacement cards </li></ul><ul><li>Branding </li></ul><ul><li>Servicing </li></ul><ul><li>Information management / multiple databases </li></ul>
  59. 59. A Quick Review <ul><li>Frequent Flyer & Card Programs </li></ul>
  60. 60. Frequent Flyer & Card Programs <ul><li>Prior to 1980, FFPs Not Possible </li></ul><ul><ul><li>Airline Industry Regulation </li></ul></ul><ul><ul><li>Lack of Infrastructure </li></ul></ul><ul><li>Dominated by Unsophisticated Offerings </li></ul><ul><ul><li>Merchandise & Coupon Based </li></ul></ul><ul><ul><li>S&H Greenstamps </li></ul></ul><ul><ul><li>Raleigh Cigarette Coupons </li></ul></ul><ul><li>1981 Regulatory & Market Changes Give Birth To FFP </li></ul><ul><ul><li>American invents frequent flyer miles </li></ul></ul><ul><ul><li>Loyalty Becomes Impossible Without A Planned Program </li></ul></ul><ul><ul><li>Hertz joins and subsequently drops, citing the high costs. Later rejoins after dramatically losing market share without a FFP. Today Hertz belongs to 20 FFPs </li></ul></ul><ul><ul><li>After in-house Frequent-Stay Programs, hotels conclude that the greatest marketing benefits still come from the FFPs </li></ul></ul>
  61. 61. Frequent Flyer & Card Programs <ul><li>&quot;We didn't want an FFP. But it came to my attention that FFPs were siphoning business travel away from us. We did it defensively, and I think if we had not done that we would have been terribly disadvantaged.&quot; </li></ul><ul><li>- Herb Kelleher, President, Southwest Airlines </li></ul><ul><li>First 20 Years Of FFP 9.77 Trillion Miles Accumulated </li></ul><ul><li>- Source: InsideFlyer Magazine 2001 </li></ul><ul><li>1985 - Banks Team Up With Airlines </li></ul><ul><li>Co-branded Cards Wildly Successful </li></ul><ul><ul><li>Average spend up to 10x higher </li></ul></ul><ul><ul><li>Active account rate up to 80 percent or higher </li></ul></ul><ul><ul><li>Attrition and acquisition costs decline </li></ul></ul><ul><li>150,000 members in 1981 to 200,000,000 members in 2001 </li></ul>
  62. 62. Frequent Flyer & Card Programs <ul><li>By 1991: All major airlines and banks established exclusive relationships and Hundreds of credit card issuers locked out </li></ul><ul><li>1994: “Virtual Airline” is Born – Generic Mile Programs </li></ul><ul><li>Miles by a different name: </li></ul><ul><ul><li>Single Branded Miles vs. Co-branded Miles </li></ul></ul><ul><ul><li>Generic vs. Branded Points </li></ul></ul><ul><ul><li>Non-Restrictive Points – Any Airline In The World </li></ul></ul><ul><li>How Generic Points Work: </li></ul><ul><ul><li>Sold to Over 125 of the largest US Banks </li></ul></ul><ul><ul><li>Consumer Acceptance: fees $25 to $75 </li></ul></ul><ul><ul><li>Spend Ranges: $8,000 to $22,500 a year </li></ul></ul><ul><ul><li>Officially Sponsored by MasterCard </li></ul></ul><ul><ul><li>Amex plays “Follow the Leader” </li></ul></ul><ul><ul><li>$200 Billion + Spent on Enrolled Cards </li></ul></ul><ul><ul><li>No need to Co-brand with an airline partner </li></ul></ul>
  63. 63. Top Banks With Unrestricted Programs: <ul><li>Capital One </li></ul><ul><li>GE Capital </li></ul><ul><li>Travelers Bank </li></ul><ul><li>Direct Merchants </li></ul><ul><li>Bank One </li></ul><ul><li>Wells Fargo </li></ul><ul><li>Household Bank </li></ul><ul><li>Town North </li></ul><ul><li>Citibank </li></ul><ul><li>Household Credit </li></ul><ul><li>First USA </li></ul><ul><li>Fleet </li></ul><ul><li>Morgan Stanley Dean Witter </li></ul><ul><li>Chase Bank </li></ul><ul><li>Charter One </li></ul><ul><li>MBNA </li></ul><ul><li>HSBC </li></ul><ul><li>Comerica </li></ul><ul><li>Merrill Lynch </li></ul>
  64. 64. Loyalty Learning’s <ul><li>71% of consumers if FFP said they wouldn’t trade their frequent flyer benefits for lower airfares. </li></ul><ul><li>Source: Frequent Flier Magazine </li></ul><ul><li>The proven addition of miles can drive repeat purchases and maximize customer lifetime value. </li></ul><ul><li>Source: Hambrecht & Quist </li></ul><ul><li>Consumers charge about $3,200 a year on a typical credit card – add miles and they spend more than $18,000 a year. </li></ul><ul><li>Source: Bank Rate Monitor </li></ul>
  65. 65. Universal Mile + Network + Card The Network as a Catalyst for Increased Spend and Activation Miles Earned Through Partners: 2,125 Miles from Card: 1,325 + Total Earning that Month: 3,450 + $ XYZ BANK $1,325 300 Miles 800 Miles 250 Miles 100 Miles 375 Miles 300 Miles $ 300 $ 300 $250 $ 100 $ 75 $ 300 Gas & Oil Grocery Electronics Trip TeleCom Retail (online & offline) + + + + + PLUS all other card purchases outside the partner network Purchases on card at partner retail locations
  66. 66. Universal Mile + Network + Card Increase in Monthly Charge Volume (in $Millions) * Revenue figure based on 2.9% of gross charge volume in interchange and miscellaneous fees, plus 60% revolving balances at 13.9% annual interest. Average Monthly Spend Incremental monthly revenue volume increases 400%+ & revenues increase $100 Million + a year. EXAMPLE* Incremental monthly charge volume goes from $72M to $314.2M—an increase of 430% Sample Card Issuer with 200,000 cards Increased Spend Increased Activation Increased Acquisition TOTAL $ 4.0 M $ 2.7 M $ 1.9 M $ 8.6M $ 48.0 M $ 32.8 M $22.3 M $ 103.1M Monthly Revenue Increase Annual Revenue Increase
  67. 67. Card & Mile Issues To Keep In Mind <ul><li>Attainability Of The Program Member: Limited Earnings Capability = Short-Term Loyalty & Interest </li></ul><ul><li>Single Partner, Stand Alone Programs: Even Top Customers Can’t Make For A Successful Program – It Requires A Network </li></ul><ul><li>Just Because They Carry Your Card Doesn’t Mean You’ve Captured Their Heart: &quot;The research shows clearly that the existence of a loyalty card scheme is not associated with a degree of loyalty in shopping habits.&quot; -Source: Customer Loyalty Today </li></ul>
  68. 68. Trends – Relationship Convergence Wireless <ul><li>Data </li></ul><ul><li>Availability </li></ul>Security Loyalty
  69. 69. Thank You For Your Time Kim Resch, Founder and President Creative Commerce Group, Inc . is dedicated to the support of their client’s needs and solutions. Each client offers unique and special challenges, whether in technology, in concept development, in speed to market or hardware to make it happen. But through disciplined project management, we have helped clients' launch new products successfully, time-and-time again. <ul><li>Decision making around technical issues is expensive. Think-tank atmospheres are vital, yet difficult and expensive to implement in corporate America. Efficient implementation is the key to success. It is not an environment for a learning ground. Let us help with: </li></ul><ul><ul><li>Resources for the Emerging Commerce Industry </li></ul></ul><ul><ul><li>Smart Card and Magnetic Stripe Solutions </li></ul></ul><ul><ul><li>Hardware Equipment and Implementation </li></ul></ul><ul><ul><li>Stored Value Card Applications </li></ul></ul><ul><ul><li>Loyalty Strategy Specialist </li></ul></ul><ul><ul><li>Project Management Formula “Methodlogically” </li></ul></ul><ul><li>636-861-9850 or </li></ul>
  70. 70. Thank You For Your Time <ul><li>David Carrithers, Chief Bee Keeper </li></ul>Providing consulting services for business individuals looking for honest and straightforward counseling, coaching & implementation of business solutions that improve profit performance and loyalty with employees, channels and customers. 707-484-3620 or e-mail <ul><li>Generating Results Through: </li></ul><ul><li>Targeted Individualized Coaching Program </li></ul><ul><li>Improved Customer & Employee Loyalty </li></ul><ul><li>Enhanced Product, Market & Business Development Results </li></ul><ul><li>Profitable Brainstorming & Product Creation </li></ul><ul><li>Faster & More Accurate Product & Business Launch Management </li></ul><ul><li>Unbiased Incentive Program Assessment & Support </li></ul><ul><li>Dynamic Organizational Development </li></ul>