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June 15, 2000


The Rediff Business Special/Nikhil Falerio

Smart cards gaining currency; set to change spending habits

P K Rao, Dean (R and D), IIT, PowaiWould it be like venturing into the realms of science fiction if you were told that all your net assets could now fit into your sleek wallet -- snug as a bug in a rug, so to speak? Very well then, welcome to this futuristic domain. Witness for yourself what would be the shape of things to come. This glimpse into the future will reveal how your spending habits would undergo a momentous change.

send this business special feature to a friend And wonder of wonders, the path that would take you through this seemingly Utopian zones emerges from the hallowed portals of Indian Institute of Technology, or IIT, Powai.

The trailblazing IIT campus, author of many a footnote to Indian history, is abuzz with a rather novel activity. The 1,400 students at the campus and the numerous local vendors in the vicinity are being subjected to an 'economic' experiment. Dubbed 'Smart Rupee Systems', or SMARS, the experiment has been co-sponsored by the Reserve Bank of India and a host of other banks keen to get into e-commerce and the smart card business.

The Indian Institute of Technology, PowaiThe success of the IIT experiment could spell a major change in the way transactions are carried out. Indian might within a year begin using smart cards to pay utility bills and buy bus tickets - among other things. Cash could well become the poor man's credit card with the advent of the smart card.

The trial runs have just concluded at IIT, Powai. So, why Powai? "IIT is a city in itself. So, we can control the experiment better. Most important, here dwell the country's finest minds. If they can find fault with the card, we can rectify it right away," says P K Rao, Dean, R&D, IIT, Powai.

How will the smart card alter the face of the Indian monetary system? Smart cards and other forms of electronic money are the next stage of monetary evolution, after commodity money. And as commodity money becomes more and more mundane, there will be a gradual shift to electronic money.

With the development of e-commerce, tools such as the smart card are the medium of the future. Small value purchase payments could spur the use of the smart card, more so than the credit cards, as the benefits that accrue due to smart cards are tremendous. The time, money and effort that the entire country goes through when settling cooking gas, electricity, telephone and other bills are enormous. A smart card all would eliminate most of these irritants.

A study conducted by Frost and Sullivan, management consultants, reveals that the Indian smart card market could swell to 3 million by 2005. In contrast, even 12 years after they were made their appearance into the country, credit cards total a mere 3.5 million. Says M N Gopinath, executive vice-president ICICI Bank, "What has led to the slow growth is that banks and other institutions have preferred to stay on the sidelines and watch because there are no guidelines and no standards. The day you have benchmarks in place, the smart card industry will flourish."

BPCL's Petro CardEven as the IIT whiz kids try to find fault with the smart card, the Bhrihanmumbai Electric Supply and Transport Undertaking, or BEST, has completed its own project with smart cards. Similarly, the Bharat Petroleum Corporation Limited, or BPCL, too is aiming for one million customers by the year-end for its 'Petro Card'.

But these are not isolated cases. IDBI Bank is working on its smart card project at Renukoot in Uttar Pradesh, and will launch it in Bombay soon.

But how does this futuristic piece of plastic help the ordinary man? There are numerous ways in which it proves beneficial to people. A high level of hard currency floating around has four effects:

  1. Torn and soiled notes.
  2. Consumers losing interest on cash lying idle at home. It is also unsafe to keep large amounts of cash at home.
  3. The enormous strain on the RBI which has to print, store and distribute large sums of cash across the country. With the cost of printing notes and minting coins escalating by 30 per cent, the use of smart cards makes even more sense.
  4. Smart cards also help eliminate this risk of counterfeit currency.

The new plastic magician would also help reduce the amount of loose cash lying with the public. This money could then be utilised effectively by the banks. Also, electronic money allows you to transact without taking money out of the banking system. Banks benefit because till you actually spend money they can create credit by lending the money. Transactions are simpler. At the end of the day the seller connects to the bank through a modem and drains out the money from the various accounts into his account. This way the consumer keeps his money safe and the vendors do with low infrastructure costs.

"This is the only alternative to cash. Simple, cheap and less risky," says Vijay Parthasarathy, managing director, Gemplus -- a company that manufactures smart cards.

With their ease of operation and safety value, smart cards have been accepted globally. In six years, the worldwide volume of smart cards has increased five fold to 1.9 billion cards. According to statistics from the Bank of International Settlement, smart card transactions in France have almost caught up with the value of cheque transactions at 13 billion francs. This success could well be emulated in India if smart cards are used for various small cash transactions.

So where can a smart card be actually effective? With the average credit card transaction in India worth Rs 1,000 to Rs 1,200, the cost of such a transaction works out to Rs 15 to Rs 20 to the purchaser. Thus, buying small items like a coffee mug or groceries does not work out to buyers' advantage. This is where the smart card comes into effect. Says Vishal Pandit, country manager Visa Cards, "Smart cards have one great advantage: they can be used by anyone, whereas credit cards require some formalities."

The market for smart cards seems wide and deep. The first potential users will be car owners, because they have to make regular fuel purchases. The second largest base would be the users of mass transportation where the average purchase size is between Rs 5 to Rs 200. This is the area that BEST and BPCL are aiming at. BPCL has already 500,000 customers for its Petro Card, whereas BEST has sold 13,000 cards on select routes. However, the purpose of the two cards is different: the petro card is a loyalty card where the customer gets additional mileage points for using the card, whereas the BEST card aims at greater convenience for customers and improving its own efficiency. Admits Vinay Lal, transport commissioner, BMC, "The smart card has eliminated one great problem: the loose change problem. One swipe and your journey is assured. You do not have to worry about carrying small coins and change."

With banks like Bank of Baroda, IDBI, institutions such as BEST, BPCL and the Gujarat Road Transport Authority considering the use of the smart card as the money of the future, the transformation of the monetary system in the country is inevitable. And for Indians who have always been at the receiving end of torn, dirty and sometimes no-change situations, things may change for the better.



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