A fair division of the spoils is the sticking point between retailers and banks as the smartcard is hailed as the ultimate weapon against credit card fraud. Ed Bedington reports Crime-busting smartcards are the answer to a bank's prayers and something the government is keen to see become a reality. Just think of it. No longer will foreign restaurants swipe your card twice without you realising, and card theft and muggings would be reduced if it were less easy to use the stolen card. There's big money in plastic card fraud, a fact the banks are painfully aware of but, at the moment, they're virtually powerless to combat it. Last year, losses soared to a massive £300m and, if unchecked, that is expected to rise to almost £800m by 2005. Only smartcards have the answer. But for retailers who face changeover bills running to millions of pounds, one big question remains ­ "What's in it for us?" They argue that the huge upheaval is designed primarily to save banks money ­ unless they in turn pass the savings on in the form of lower transaction charges to stores. Smartcards, otherwise known as chip cards with PIN, could well consign card fraud as we know it to the history books, but there is a snag, and as far as a bank is concerned, that snag is the retailer. The problem boils down to money, or more importantly, who's going to foot the bill for the upheaval. Introducing the chip card is going to be a mammoth task with the cost estimated to be more than £1bn, and at the moment it is being suggested the banks pay around £700m with retailers making up the rest. But this, say the chains, is an unfair split. Safeway's corporate finance director Simon Lane says: "The cut of the benefits cake is somewhat different from the cut of the costs. "There's big upfront investment needed in this technology but the benefits are unclear. The benefits are more for the banks and there's no question this is why the banks are pushing it so hard. They've got a lot to gain by stopping fraud." At the moment, negotiations have taken place between the British Retail Consortium and the Association for Payment Clearing Services, representing the banks. BRC spokesman David Southwell says a commitment has been made to begin phasing in the new cards by 2004, although no date has been agreed to phase out the magnetic stripe systems. "The move towards chip and pin is going to affect all retailers. Although we are not involved in the individual discussions with the banks about compensatory packages, we understand progress is being made. "However, we also understand the banks could afford to be more generous in those packages and we as the BRC are still pushing for reduced transaction charges." Southwell says one of the main reasons for the current high credit card transaction charges has been down to the consequences of fraud. They are arguing that because the new cards will put an end to fraud, those charges must come down. "The banks are the ones who are going to be saving money and the new cards mean the justification for those high charges will no longer exist. " And, at the moment, retailers are sticking to their guns in spite of pressure from the banks, A spokesman for Tesco says all multiple retailers have been working closely with all parties to introduce the new system, but: "The decision to roll out chip readers will depend on the commercial arrangements between the retailer and their acquirer." Sainsbury, as well, says it is positive about the introduction of the smartcards, but it is still waiting to hear what contribution the banks, and maybe even the government, will be making towards the cost of changing over the systems. Safeway's Lane adds: "Something like this is an irritant if it's not going to add any real value. We're talking many millions for each retailer and a payback in the dim and distant future. It's a disruption, and retailers who have just upgraded their equipment won't want to do it again so soon. We all have limited resources, and this is a major project which would be plonked alongside all the other work we're doing." But he says, discussions are slowly continuing. The banks made the decision to move to chip cards in 1998 and we are all now beginning to see the small gold chips appearing on our cards. Richard Tyson-Davies of APACS says: "By the back end of 2002 every card issued will have a chip on it, but that's not much good without the terminals." He says businesses like the independent c-stores which lease their equipment from the financial institutions, are already beginning to see their systems upgraded for free by banks. So you won't hear the likes of Spar or Londis complaining. But the bigger retailers which own their own equipment face large upgrade costs and are not moving quickly enough for the banks. A bill running to millions of pounds is one of the main reasons for their reluctance. Tyson-Davies says for the banking industry it's simple: "It is purely a fraud issue. The cases are running up really fast, and doubled last year. We're dealing with organised criminals, not just kids. There's big money involved. "Having a pin number at PoS has been a long term objective of the banks. We have all agreed that this is the way ahead, there is clear industry agreement that we'd like to get there." But for all the sense of urgency and eagerness in the banking world, the fact remains that retailers are not going to be pushed into signing up to something that holds no benefits. Tyson-Davies recognises this: "The retailers are looking for the banks to soften the blow. "At the moment, there are some benefits. For instance, retailers will not have to keep paper receipts because all the details will be held electronically back at base by the banks. There are also further down the line advantages for retailers, like unattended checkouts." But as Asda points out, the real benefits are only going to come from cost savings. A spokeswoman says: "Currently the banks are making very healthy profits from retailers and the new cards look set to deliver considerable savings to the banks, so what we're interested in is sharing in those cost savings. "If there are savings to be made, we'd like to pass them on to our customers." Visa is one company keen to see the introduction of more secure credit cards and has even introduced an incentive fund of 160m euros to encourage both banks and retailers to push the system forward. Waqar Qureshi, Visa's head of chip infrastructure, says: "It works on the principle that for every card issued, the banks receive one euro, while for every placement of chip-enabled terminals they receive around 220 euros. We are aiming to get critical mass by 2005." Qureshi says it recognises the task ahead: "We're talking about huge changes, not only the terminals and cards, but backroom operations, staff training. Sorting all of these things takes time and money. "It will take a while to transfer. Paper to magnetic took 15 years, and magnetic to chip will take about seven, so we have around four or five years left to go now." But are the credit card companies being optimistic? After all, the speed with which these smartcards are introduced depends entirely on how quickly negotiations between the banks and the retailers can be concluded. Many retailers are less than impressed with the size of Visa's incentive fund, describing it as a drop in the ocean compared with the costs. But the delays have not all been about money, according to the BRC's Southwell. He says the original issues revolved almost entirely around the technical implications and problems. "Cost is not the only issue. There have been other considerations for retailers. "We did have some serious concerns on the practical issues, which included the length of time the new cards would take at the point of sale. "The last thing retailers want is something that takes ages at the checkout. However, all the parties have been working together to solve any time lag problems and it may even be faster now." Safeway's Lane agrees that the technical side has improved: "We can see the technical aspects are being addressed, and transaction times are being improved. We've done some tests ourselves but the next stage would need to be a decent size trial, a town trial." So at the moment things appear to be at a standstill and unless all parties agree, smartcards appear to be doomed, although APAC's Tyson-Davies says the banks may still attempt to go through with the system. But without the support of the major retailers how successful could it be? "It's a chicken and egg situation," says Lane. "It's a complex project and requires a critical mass of both customers with cards and retailers with the right equipment." But which comes first? Unless terms can be agreed no-one will be willing to invest millions in a venture that could well end up on the scrap heap. But the big retailers are not rejecting the system out of hand. As Lane says: "I think we are receptive, we are open to persuasion. Discussions are ongoing, but it's early days. We're on the road but don't know how far down it we will go." With government pressure mounting for card crime to be cut back, it remains to be seen how long both parties can hold out. {{COVER FEATURE }}