Magazine

Smart Cards Focus on Cities and Manufacturers

By Ed Ritchie

There are many so-called cashless approaches to collecting revenue. They include credit cards, debit cards, affinity cards and cellphones. One new approach is using smart card technology. This resolves some of the major issues with credit cards, but is not yet pervasive in the industry. However, its rollout in a number of major cities in the U.S. has been successful.
A major supplier of the technology is Parcxmart. The company's CEO, John Regan, believes that a smart card targeting small-dollar transactions offers a unique value proposition. "For consumers, this card is all about convenience," Regan says. "They can pay for parking in single or multi-space meters, and easily make purchases with local merchants. And this is a card that can function across participating cities, regions and even the nation."
An additional argument for smart card technology is the higher level of security, he says. "As fraudsters grow in size and capability, magnetic swipe card compliance is becoming more and more onerous and expensive." Security expenses also concern the pay-and-display manufacturers. "They are complaining about all the compliance rules as never-ending and more and more expensive and time-consuming," Regan says. "And there are the back-end charge-backs and fraud protections compliance too."
So the benefits of smart card technology make for a persuasive pitch, but how have they played with the meter manufacturers? Duncan Parking Technologies, Cale and POM have begun smart card programs. Moreover, Duncan is developing meters for phase two of trial programs in New Haven, CT, and San Jose, CA. The trials launched in May.
While this program may be the first to rally manufacturers behind an outsider's payment card, it's not the first attempt to use smart cards for parking meter transactions in the U.S. According to Larry Berman, an industry consultant and 34-year veteran of the New York City Parking Authority (commissioner from 1993-97), his city experimented with a smart card-based program in 1995.
"We tried it and about five other cities, including Miami, also tried and failed," Berman recalls. "They were successful in the first months, but the programs wither because cities don't have the personnel, or the knowledge and drive, to run them. And worst of all, they weren't able to include the merchants." Merchants often see meters as detrimental to their business because they encourage customers to shop at malls, where parking is free. It's a fallacy, says Berman, but one that needs to be addressed by starting with incentives to both merchants and their customers and finishing with benefits to the city.
Parcxmart has taken that approach and, so far, has issued 1,300 cards in New Haven and 500 in San Jose. Merchants and city officials are reporting satisfaction with the first two months of the program. Cards are free to consumers at this point. They can be loaded with up to $100 by local merchants. Initially in New Haven, 35 merchants signed up, along with nine New Haven Parking Authority garages and lots and 26 private garages. They account for approximately 12,000 parking spaces.
According to Paul Wessel, New Haven's Director of Parking and Traffic, the program works well and has provided some unexpected benefits. "We are marketing this as the 'New Haven' card, so we're branding the city, and there's some real excitement about it," Wessel says. "We have civic pride going on here, and there's a 'cool factor' that I underestimated."
Meanwhile, New Haven now collects 90 cents of every dollar spent on prepaid parking, with the remaining 10 cents going to the vendor. It's a vast improvement over the previous prepay paper voucher system in which the city collected only 62 cents on the dollar.
New Haven has about 2,700 parking meters and Wessel's department plans on replacing their modular coin mechanisms to accept smart cards, while raising their total inventory to 3,000. New Haven is also considering introducing pay-and-display machines with its new single-space meters as it rolls out the program citywide. Its metered parking currently costs 75 cents an hour citywide. Administrators are considering a new rate of $1 to $1.25 an hour. Rate adjustments will start with lower hourly rates for nights and weekends, with future discounts possible as an incentive for local holiday shopping.
The rate flexibility and smart card-based turnkey programs are designed to offer an attractive package for municipal parking authorities. The city makes no investment upfront, and the vendor handles marketing, advertising, card issuing and system deployment. On the transaction side, services include a payment platform that complements existing Electronic Funds Transfer (EFT) networks, retail merchants and merchant banks on behalf of municipalities and consumers. The company routes all of its own transactions, and POS transactions enter its back office first.
The entire package of services can lower costs to both cities and meter manufacturers. "There are no charge-backs, fraud or unauthorized transactions," Regan says. "Our settlement and processing fees are less than credit cards, and most cities don't realize they pay both a fixed transaction fee plus a percentage discount. So, on a $2 transaction, it is not unusual for credit card fees to exceed 30 cents per transaction, whereas ours is a flat 20 cents and all sales are final."
The system also reduces a nuisance expense for cities -- coin collection. Regan says there's roughly $3 billion in quarters collected annually from U.S. parking meters, and cities are looking for solutions. Larry Berman agrees, noting that handling and theft are problems in New York, which has more than 62,000 meters and processes a million quarters per day.
For merchants, the benefits include advertising in local media, merchant signage, and a consumer rewards program designed to encourage usage, loyalty and loading. The program hasn't been finalized yet, but Regan says it offers a "cooler than cash" appeal, and will help merchants build income generation, increased traffic and customer retention. "The loyalty program is an instant gratification program based upon usage at each particular merchant," notes Regan. "This can be done only with a smart card."
The program is very popular at Moka A Chocolate Cafe, says owner Duncan Goodall. "For the young 20- to 30-something professional types, this is right up their alley," Goodall says. "We have free Wi-Fi Internet access, and the idea of a smart card is easy for them to understand." Goodall counts about 80 unique Parcxmart users who have made purchases since the launch, and he believes the smart cards are more conducive than credit cards for small transactions.
"Most people seem to have a psychological barrier to using a credit card for anything below $10, and this [smart] card effectively fills that gap," says Goodall.
Parcxmart doesn't charge transaction fees for consumers. As Regan says, no payment system has ever survived with the consumer paying for the freight. However, reloading by credit or debit card costs $2. If cash is used, the cost is waived.

Ed Ritchie is a Los Angeles-based freelance writer specializing in business and energy technology. He can be reached at eritchie@pacbell.net.

Article Abstract from August, 2005




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