The `Smart Card`: Can It Stop Fraud?

April 21, 1985|By New York Times News Service.

Credit cards used to be simple. First, there was just the plain, plastic card, embossed with a number. Then came the magnetic strip, three tracks of encoded data that identify the cardholder, speed credit approvals and make it possible to get cash from a teller machine.

Now, in a reversal of the usual flow of technology between the United States and Europe, American companies are starting to toy with the French-designed ``smart card,`` a credit card bearing an embedded microprocessor. Rather than run the card through a computer, designers decided they would put the computer inside the card, jammed with everything from a digital portrait of the card user`s signature to a credit limit and a record of the card`s last 200 transactions.

This summer, MasterCard International Inc. will start distributing thousands of them in a pilot program in the Columbia, Md., and Palm Beach, Fla., areas.

Whether consumers will ever develop much enthusiasm for the cards is still an open question, though, and a host of technical and social problems have yet to be faced. Even some credit-card companies are unimpressed.

``It has best been described as a solution without a problem,`` said Kathleen Lavidge, vice president of funds-access services at American Express. ``And it`s very, very expensive.``

However, John C. Elliott, executive vice president of electronic services at MasterCard, who is heading up the Washington and Florida experiments, disagrees. ``If smart cards work, we`re going to solve a lot of problems fast,`` he said.

Chief among them is fraud.

Making illegal use of a credit card these days doesn`t take much talent. While credit-card companies have made counterfeiting efforts more expensive by placing hard-to-reproduce holograms on some cards, fakes abound. Most thieves are guaranteed at least a few hours` shopping spree before transactions on a stolen card are halted. That leeway cost credit card companies hundreds of millions of dollars last year.

Counterfeiters will find it expensive at best, though, to install properly encoded chips in their own reproductions.

Pickpockets will face an equally difficult problem: Before the merchant`s terminal will approve a purchase, the smart-card user must type a code number, like the kind used in bank teller machines.

An algorithm to approve the codeword will be stored on the chip, meaning the password will never have to be transmitted to a central computer. That reduces the chances that even a thief well versed in the art of tapping data transmissions will get the code. On top of that, a stolen card`s chip will be rendered inoperative as soon as someone tries to make a purchase with it.

Identification numbers aren`t the only way to assure that the right person is using the card. A digital profile of the card user`s signature, invisible to the thief, could record not only what the authorized signature looks like, but how quickly--and in what pattern--certain letters are formed. When the card user signed the credit-card slip, a pad beneath his pen would detect the signature pattern and compare it with one stored in the chip.

``The other identification methods we are examining are mostly biometric, like fingerprints,`` Elliott said. Taking a page from some government security tactics, the company is investigating the practicality of a point-of-sale terminal that scans the card user`s finger, then compares the print to the profile stored in the card.

The card guards against not only fraud but overindulgence. In the debit card experiments conducted by the Bull Group in France, where more than 3 million smart cards will be in circulation by the middle of next year, the user`s available funds were recorded in the specially designed Motorola 6805 chip embedded in the card. With each purchase, a transaction record was written into the memory, and the purchase amount was deducted from the available funds.

``What we`ve discovered is that the variety of information you could store in the chip is endless,`` said Paul Wittfeld, vice president of marketing for Micro Card Technologies Inc., a Dallas-based subsidiary of Bull that says it can now produce the cards for about $4 each when they are purchased in large volumes.

Among the other possibilities: emergency medical information readable at a hospital, portfolio information that would make it possible to trade stocks at a teller machine, even a personal telephone directory that would appear on a pay phone`s screen when the card is inserted.

Still, skeptics abound. Spencer Nilson, publisher of a newsletter for the credit-card industry, said: ``I don`t want a card with my history in it--I don`t even want a magnetic strip.`` Moral objections aside, he points out that many manufacturers have entered the fray with cards that are so far incompatible.

In the end, though, what might kill the card isn`t cost or compatibility, but Coca-Cola. Arthur D. Little & Co. is conducting engineering tests to determine what happens when the chip is bent, magnetized or mashed. The most grueling test: whether it can stand a dunking in soda.