Roger Clarke's Web-Site

© Xamax Consultancy Pty Ltd,  1995-2024
Photo of Roger Clarke

Roger Clarke's 'Smart Cards in Banking and Finance'

Smart Cards in Banking and Finance

Roger Clarke

Principal, Xamax Consultancy Pty Ltd, Canberra

Visiting Fellow, Department of Computer Science, Australian National University

Version of 5 March 1997

© Xamax Consultancy Pty Ltd, 1997

Invited Paper for 'The Australian Banker' 111,2 (April 1997)

This paper is at


By adding a micro-chip to conventional plastic cards, financial services organisations extend their scope and reach. By adopting and adapting too slowly, however, financial services organisations risk major losses in market-share, and even contraction or outright failure.



Stored-Value Cards

Experiences with SVCs

Why Yet Another Payment Mechanism?

Multi-Purpose Payment Cards

Eligibility and Identity Authentication

Entrée to Cyberspace

Business Impacts

Social Impacts


Further Reading

About the Author


The term 'smart card' is subject to a variety of interpretations, but is most usefully understood as a conventional plastic card with a silicon chip added to it.

Some chips merely provide storage, and are roughly comparable to a high-capacity magnetic-stripe. The more interesting chips also contain a micro-processor, enabling the card to become an active component within large-scale systems.

Smart cards are programmable, and hence can be applied to all manner of purposes. What kinds of smart-card applications are relevant to executives and professionals in banking and finance?

Stored-Value Cards

A variety of means have been implemented whereby people can load value onto a card, and use it to make payments at appropriately equipped, unattended devices. These include multiple-use tickets for public transport, and telephone cards.

Schemes that store data using punched holes, and even magnetic stripes, are highly insecure, and very easy to defraud. Since the mid-1980s, a variety of chip-based stored-value card (SVC) technologies have been developed and trialled. These have the highly desirable feature of being a great deal more secure. Depending on the design, they can also provide a means of gathering statistical information on transactions and card usage.

During 1995-96, four separate pilots of chip-based SVCs were run in Australia. Two were by local companies, and combined payment facilities for low-value transactions in various consumer outlets, together with transport ticketing.

One of these, Transcard, is now in full operation in Western Sydney. Transcards are loaded with value in return for cash, or against a debit-card or credit-card transaction. The value is used on terminals both on merchants' premises and free-standing at public locations. The transaction totals are transmitted periodically (typically daily) from the terminal to the host processor, and the merchant's bank is advised to credit the merchant's account. This particular scheme also supports ticketing, frequency and incentive rewards, and membership applications.

Exhibit 1: The Transcard Scheme

After Clarke (1996), p.94

The other two Australian pilots were the world's first field trials of SVCs by the giants of the payments processing scene, Visa and MasterCard. That this country was chosen for this purpose is a tribute to Australian technical capabilities, and to Australian consumers' readiness to adopt new technologies.

Detailed descriptions of the four pilots, of the U.K.-based trial of the much-discussed Mondex card, and of SVC developments in one leading country over an extended period, are provided in Clarke (1996).

Experiences With SVCs

SVCs are attractive to merchants because they reduce cash-handling and change-counting tasks, as well as cash-holdings and the attendant risks of error, cashier theft and robbery. For consumers, the benefits include reduced 'wallet-bulge', less cash-handling and change-counting, and the scope for multiple functions within a single, convenient and familiar card.

Some banks may choose to leave SVC operation to third parties, and merely handle the deposits received from merchants via scheme operators. There will be an indirect benefit for banks through the reduction in their own costly cash-handling and the carriage of cash-float.

Other banks perceive the growth in SVC usage as an opportunity to enhance customer relationships. These institutions are seeking to at least co-badge SVCs, and in some cases to play the role of scheme-operator.

To date, the Australian schemes have met with mixed success. In general, technical feasibility and reliability have been fully demonstrated. The achievement of sufficiently high adoption rates and hence economic feasibility, on the other hand, appears to depend on the ability to achieve critical mass across several dimensions.

A vital lesson needs to be learnt from the experience with EFT/POS. Until the 'any-card/any-terminal' condition was fulfilled, consumers and merchants alike regarded the technology with scepticism, and early-adopter institutions had their fingers burnt. Consumers and merchants need the assurance that SVC schemes will not be fragmented through unhelpful forms of competition.

Another concern is the breadth of usability of the card. Experience has been gathered in this regard, because the four Australian pilots have tested the kinds of outlets at which people are prepared to use a card in preference to notes and coins, and have provided evidence of the kinds of additional uses that can gainfully complement stored-value.

Why Yet Another Payment Mechanism?

The question has to be asked as to whether consumers and merchants really need yet another form of payment mechanism.

Credit-cards are appropriate in particular circumstances. They are, however, very expensive. This is primarily because of the low level of security (which relies on embossing, magnetic-stripes, signatures and stop-lists), and the resultant high and increasing cost of fraud. In addition, transaction processing costs are significant.

Debit cards are relatively highly secure, because they require the customer to confirm that they know something that only the card-owner should know: the PIN. But whereas the costs from error and fraud are very low, the communication costs associated with fully on-line transactions are high.

Unlike 'pay-later' credit-cards and 'pay-now' debit-cards, SVCs are a 'pay-before' mechanism. Their great advantages are relative security, and simple, off-line operation. Together, these translate into low transaction costs.

The net effect is that payment specialists, such as Cards ETC's Michael Walters, talk of a 'pyramid' of payment transactions. At the top are relatively small numbers of 'pay-later', credit-card transactions, each of relatively high-value (say, above $50), which justifies reasonably high transaction costs. In the middle are moderate volumes of moderately-sized ($20-$200) 'pay-now', debit-card transactions.

At the bottom of the pyramid are myriads of low-value transactions too small to justify even debit-card costs. At present these are mostly performed using cash, which has high hidden costs for merchants and banks. This is the target area for low-cost SVC transactions. So the 'pyramid' theory proposes that all of these payment mechanisms have their place.

Multi-Purpose Payment Cards

SVCs could be established as, and remain, a standalone payment mechanism: yet another card to be stuffed into the wallet and purse, in return for fewer coins and notes. But many financial institutions have already perceived the scope for chip-based cards to support multiple functions rather than just one.

In some cases the chip itself may have no role to play. For example, debit-card and ATM transactions can continue to be performed quite satisfactorily using the magnetic-stripe. Moreover, the 'real estate' on the card can be used to display logos, and thereby sustain a relationship between the financial institution and the card-holder. For credit-cards, on the other hand, chip-based processing offers the possibility of greatly improved security, and hence reduced losses through fraud.

Very high costs have to be faced, however, in order to re-equip millions of card-holders and tens of thousands of merchant locations.

As a result, there is a strong motivation for issuing multi-purpose payment cards, that support whatever combination of debit, credit and SVC functions the customer seeks. The MasterCard Cash trial in Canberra, and the later phases of the Visa trial on the Gold Coast, expressly tested the combination of multiple payment functions into a single card.

Eligibility and Identity Authentication

Because of their programmability, chip-based cards are capable of performing many further functions. Access to buildings and to locations within buildings can be regulated using such devices. Similarly, chip-cards can be an effective and efficient way to represent and check tickets, and to provide evidence of organisational membership.

In some applications, the appropriate test is simply whether the person presenting at a location carries a particular kind of authority. In other circumstances, the authority is specific to an individual, rather than just a bearer instrument. The former, looser class is usefully referred to as 'eligibility authentication', and the latter as 'identity authentication'.

Entrée to Cyberspace

Over a million Australians have already experienced the Internet, and hundreds of corporations and government agencies are committing significant resources in an attempt to exploit the medium for their own purposes: cyberspace is no longer just a playground.

Smart cards are capable of playing several important roles in commercial and even community aspects of the Internet. Net-based payment schemes can be card-based, and eligibility and identity testing can be performed remotely just as readily as they can be at a location like a turnstile or an ATM.

Business Impacts

The good news for financial services organisations is that chip-cards are available as a tool to support existing services, to enable integration of existing product-palettes into cohesive bundles, and to lay the foundations for new kinds of products leveraging off existing customer-relationships.

There are a couple of very significant downsides, however. One is that innovative financial institutions are well-advanced in their plans to exploit chip-cards, and hence the late adopters will find themselves 'playing catch-up' rather than taking bold initiatives.

Another problem for the banking and finance sector is that chip-cards provide new entrants with means to overcome the existing barriers to entry. Worse still, they represent a powerful tool for organisations offering substitute products and services to attack the heartland of financial services organisations' business.

Social Impacts

The power of the chip-card gives rise to many concerns among members of the public. These range from the security of the value stored in cards, consumer rights issues, and workplace impacts, to privacy. These were recently examined in a report by a team led by the Monash University Centre for Electronic Commerce (ACFF 1996).

Payment schemes, with particular reference to chip-based SVCs, were also the subject of a recent survey of privacy attitudes (MasterCard 1996). There is a very real risk that negative social impacts of smart card applications could hold back the development of these schemes.

The smart cards industry, concerned about such problems, has been proactive on the consumer rights and privacy issues, and has just this year published a Code of Conduct designed to be applied to all chip-card schemes (APSCFA 1997).


The messages for financial services executives and professionals are simple: "participate or perish", and "if you haven't already started, you'd better start running hard".

Further Reading

APSCFA (1997) 'Smart Card Industry Code of Conduct' Asia Pacific Smart Card Forum - Australia, Canberra, February 1997, 13 pp. Available from APSCFA, G.P.O. Box 1966, Canberra ACT 2601, tel. (06) 247 4655

ACFF (1996) 'Smart Cards and the Future of Your Money' Australian Commission for the Future, Melbourne, August 1996, 182 pp. Details at:

Clarke R.A. (1996) 'Chip-Based Payment Schemes: Stored-Value Cards and Beyond' Xamax Consultancy Pty Ltd, Canberra, September 1996, 175 pp. Details at:

MasterCard (1996) 'Privacy and Payments', MasterCard International, Sydney, November 1996. Available from MasterCard International, 146 Arthur St, North Sydney NSW 2060, c/- Ms Leanne Flodin, tel.: (02) 9959 5277

About the Author

The author is a Canberra-based consultant specialising in electronic commerce, information infrastructure, and dataveillance and privacy. He has spent close to thirty years in the information technology industry in Australia and overseas, and was for over a decade Reader in Information Systems at the Australian National University. He holds degrees in Commerce from the University of N.S.W., and a doctorate from the A.N.U.

He conducts his electronic commerce work in conjunction with the nation's leading specialist consultancies, Electronic Trading Concepts - ETC, at, and Cards ETC, both of Sydney; and the Centre for Electronic Commerce at Monash University, at

His own substantial community-service pages in this area commence at:

xamaxsmall.gif missing
The content and infrastructure for these community service pages are provided by Roger Clarke through his consultancy company, Xamax.

From the site's beginnings in August 1994 until February 2009, the infrastructure was provided by the Australian National University. During that time, the site accumulated close to 30 million hits. It passed 65 million in early 2021.

Sponsored by the Gallery, Bunhybee Grasslands, the extended Clarke Family, Knights of the Spatchcock and their drummer
Xamax Consultancy Pty Ltd
ACN: 002 360 456
78 Sidaway St, Chapman ACT 2611 AUSTRALIA
Tel: +61 2 6288 6916

Created: 28 February 1997 - Last Amended: 5 March 1997 by Roger Clarke - Site Last Verified: 15 February 2009
This document is at
Mail to Webmaster   -    © Xamax Consultancy Pty Ltd, 1995-2022   -    Privacy Policy