The over 20 million domestic card industry will have to upgrade itself from the present magnetic-strip-on-plastic technology to chip-based 'smart cards' in the next three years.

This is in order to be compliant with the global Europay, Mastercard and Visa - or EMV - standard.

Banks, especially the 'acquiring' ones, are moving towards being smart card-compliant on the back of the EMV standard which would be globally applicable from January 2006.

An acquiring bank is one which approves a merchant for accepting credit cards, and then collects the merchant's online payments.

Visa International has also mandated that all new terminals installed in the country should be chip card-enabled.

"From 2006 onwards the liability of fraud charges will shift to non-EMV compliant banks - be it in the issuing side or in the acquiring side. Consequently, the roll out of the EMV standard programme has started off in the country," said Piyush Khaitan, vice-chairman, Venture Infotek Global.

A smart card is one with a chip in it and has 100 times more memory than a magnetic strip card. The memory of a magnetic stripe card is static, while that in a chip card is dynamic, says Visa International's deputy country manager South Asia, Uttam Nayak.

One of the reasons for the shift towards smart cards is to control the increasing frauds in cards.

Also, the cost of these cards and EMV compliant electronic data capture terminals has fallen over the last few years.

Nayak said: "Visa has mandated that all new terminals which are deployed in the country have to be EMV-compliant. Out of the more than 70,000 EDC terminals in the country, around 25,000 terminals are EMV capable. These machines will get activated over the next 12-18 months. The non-EMV capable terminals will be phased out by the banks over a period of time."

Most of the EDC terminals which have been put up by banks like HDFC bank, ICICI Bank are EMV-compliant.

"We are not waiting till 2006. All our terminals and automated teller machine switches are EMV-compliant. We are also working on smart card applications. When the market is ready, we will start the issuance on a gradual manner," says ICICI Bank's executive director Chanda Kochhar.

Acquiring banks are also benefited by higher interchange fees.

"Acquiring banks will have to transfer an inter-change fee of only 1 per cent as against the 1.1 per cent in instances where a magnetic strip card is used on an EDC terminal. This would make a tremendous difference to large acquiring banks such as Citibank, HSBC, ICICI Bank, HDFC Bank and Standard Chartered," adds Nayak.

Among banks ICICI Bank and ABN Amro have introduced cards with chips, while BPCL Petro Card has a smart card.

"Costs of smart cards and terminals have fallen. The new terminals which are being made worldwide are chip-enabled and the costs are now below Rs 2,000. One can also plug in a smart card reader into the existing terminals at a cost of below $100," Khaitan said.