As trials of the new payment authorisation procedures get under way retailers should be planning to upgrade to meet chip-and-Pin standards, writes Nick Huber.
In May UK banks and retailers are due to begin the trial of a multibillion-pound fraud prevention programme based on smartcard technology.
The £1.1bn chip-and-Pin initiative, which will be see consumers authenticating card purchases with a personal information number rather than a signature, is due to be trialled in Northampton in the next three months. The cards, based on a technical standard from Europay, MasterCard and Visa, should be used nationally by 2005, by which time most of the UK's 110 million credit and debit cards will be chip-and-Pin enabled.
The project is run by a management organisation set up by the Association for Payment Clearing Services (Apacs) and the British Retail Consortium. Supporters of the scheme, which has been more than 10 years in development, claim that it could more than halve credit and debit card fraud, which rose by 30% to £411m in 2001.
"It is the biggest change to how we make payments in the UK probably since decimalisation," said Sandra Quinn, director of corporate communications at Apacs.
Retailers will have to upgrade their point of sale terminals and ensure that their back-office systems are integrated with the new technology. They cannot afford to ignore it: firms that do not accept payments with a Pin authentication by 2005 will be liable for all fraudulent transactions.
Although there is broad support for the chip-and-Pin project within industry, the time it has taken to agree the parameters of the project highlights the tension between the industry sectors.
Retailers have raised concerns about the potential for lost business due to technical glitches when the system hits the shops, as well as the ability of mid-sized retailers to prepare for it.
Apacs pointed out that a similar technology has been in use in France for more than 10 years. "We have gone through pretesting the cards, and standards exist," said Quinn. "We recognise that we cannot do it without retailers - and they cannot do it without us."
The banks are the obvious winners if fraud levels are cut as drastically as predicted, but retailers' IT departments will benefit too. For instance, transaction information on the microchip embedded in debit and credit cards can be used to build up a more detailed customer profile.
Large IT projects have a tendency to hit problems, of course, whether keeping to budget or delivering on time. On the plus side both the banking and retail industries have traditionally been heavy investors in IT and are no strangers to large technology projects.
Apacs is keeping the Home Office informed about the chip-and-Pin project, and is even passing on a few pointers - the Home Office is considering using smartcards and biometric data to introduce a voluntary entitlement card scheme.
"We are working with the Passport Agency and Home Office to identify best practice about how people identify themselves," said Quinn. "We are talking to the government about the lessons it can learn from our chip-and-Pin project for its possible entitlement card. If it wants to do it there is no point reinventing the wheel."
But aside from the chip-and-Pin project the banks appear less keen to work together on new payment technologies. Plans for an electronic bill payment and presentation system and a same-day online payment service for small to medium-sized businesses were sidelined more than two years ago.
At the time Apacs said the projects had been relegated in importance because banks were focusing their resources in meeting improvements in customer service, like making it easier for customers to change banks, called for in the Cruickshank review into the UK banking industry.
Banks also said there was insufficient consumer demand for the system, although Apacs regularly reviews this and other payment issues. Even if banks do judge that the time is right to introduce these services it would take about two years to design, test and implement the technology.
Clearly the chip-and-Pin initiative will be the number one priority for banks over the next few years. All eyes will be on how the technology performs in the mass market when the trial begins. Any problems with the project are unlikely to remain hidden for long.
Apacs payment projects
A £1.1bn initiative using smartcard technology to reduce fraud for debit and credit cards. All cards will be fitted with a microchip. Customers prove their identity by keying in a four-digit personal identification number (Pin) at a checkout terminal to prove their identity. Technology due to be trialled in Northampton soon and to be rolled out nationally by 2005. Aims to more than halve card fraud.
Electronic bill payment and presentation and same day payment systems
No firms plans to introduce them, due to insufficient public demand, although not ruled out.