Target's Not-So-Smart Cards The discount retailer could have been the ideal place to introduce chip-enabled credit cards--if it hadn't rung up so many dumb mistakes.
By Ian Mount

(Business 2.0) – Talk about a smart bomb. Target's new credit card could have been the brainiest in the country. But Target executives never answered a fundamental question: Who needs a smart card anyway? Even after the charge card's debut, "I was in meetings when Target was saying, 'What's the business case?'" says Jonathan Adams, then vice president for product development at Catuity, the lead software company for the project. "Target is one of the most wired retailers around, so anything it wanted to do at point of sale it could do without a smart card."

Last March--less than a year after the program was fully up and running--Target announced that its smart card had gotten a failing grade. That's after the retailer spent two years and an estimated $40 million on its own education. And retrofitted 37,000 cash registers to handle 9 million new cards. And installed coupon kiosks at 1,191 stores. And even designed a computer system to handle it all. Yet, faced with the cost of reissuing millions of expiring cards at about $3 apiece, Target said the cards' smart functions had "experienced limited use" and the retailer would return to traditional magnetic-strip cards that cost less than a dollar each.

It was the latest and largest American defeat for a technology that should be retail's holy grail. With a 32-kilobyte silicon chip that can store an account number and personal identification number, the smart card helps banks cut fraud because it encrypts data. And it lets merchants understand the cardholder's buying habits--information that can be used to produce targeted electronic coupons.

But in Target's case, the technology offered customers little more than a cool-looking card and the chance to grab a few coupons if they jumped through a number of complex hoops. And with Visa's financial contribution drying up--research firm TowerGroup estimates it subsidized $25 million of the project's cost--Target pulled the plug.

"It was an 'If we build it, they will come' approach," says Randy Vanderhoof, executive director of the industry group Smart Card Alliance--adding that Target didn't give consumers much reason to show up.

Where's the ROI?

Though Target's was one of the first large-scale smart card rollouts in the United States, the format has seen greater success in Europe and Asia. There the cards' fraud-fighting capabilities are prized because expensive and unstable telecommunications networks make authorizing cards at the point of sale difficult. But it takes as long as four years to recoup a smart card investment by lowering fraud, says Aneace Haddad, CEO of Welcome, a software company that develops smart card coupon programs. Coupon and frequent-shopper programs are meant to speed the ROI, not to justify an entire program.

In Target's case, however, the coupon loyalty program was the only source of ROI, and it didn't pay off. The U.S. telecommunications system allows immediate card verification, resulting in a reported fraud rate of only half what the United Kingdom suffered before smart cards caught on there. So the cards' main benefit--fighting fraud--didn't drive Target's program. "Loyalty is not going to encourage or discourage smart cards [in the United States]," admits Catuity CEO Michael Howe. Indeed, without a fraud-based business case, most other smart cards have failed in this country. First USA, Fleet, and Providian are canceling their smart Visa programs, and though the American Express Blue smart card is a hit, its success is more attributable to a sleek look and low interest rate than to its microprocessor.

Keep It Simple, Stupid

While Frequent-Shopper perks were the Target card's main selling point, the loyalty capabilities were too complicated. In an industry where a 1 percent response rate to a newspaper coupon is considered high, technology works only if it makes coupon use effortless. In Target's case, though, technology made obtaining discounts more difficult. Shoppers had to order a special card reader from Target, then install the peripheral on their home computers and use it to download coupons to the cards. Or cardholders could obtain discounts at in-store kiosks tucked near customer service desks. Not surprisingly, neither harried parents--39 percent of Target customers have young children--nor tech neophytes gave the kiosks or balky peripherals more than limited use.

The complexity seems especially unnecessary when compared with supermarket frequent-shopper cards--bearing low-tech bar codes and often affixed to key chains--that offer retailers an easy way to provide discounts and track behavior. Oddly, Target had the ability to automatically download pinpointed coupons to smart cards at the register, avoiding the whole kiosk madness. The stores simply didn't use it. "They got us to develop that functionality," says Adams, the former Catuity VP, "but they never even got to switching it on." (Target declined multiple requests for comment.)

A Limited Reach

By making its Smart Card simply a souped-up credit card version of the supermarket cards, Target also ignored another major benefit of smart chips: their ability to redeem points for rewards at a network of other retailers. One shining example of how this works is the case of Turkey's Akbank smart card. When that card launched in November 2001, rewards were available at a number of retail outlets. By 2003, Akbank quadrupled the number of participating vendors to include BP gas stations, McDonald's, Carrefour, and other stores. As a result, Akbank's card market share grew from 6.3 to 12 percent in just two years.

That sort of multibank, multiretailer coalition was Visa's goal when it introduced its smart rewards platform in 2002. "By the very nature of their design," a Visa VP said at the time, "rewards services must be networked in order to achieve the greatest efficiencies." But Target had no motivation to be part of an alliance of retailers, thereby hobbling Visa's hopes to expand the program. "Entities like Target consider all other merchants competition," says Gary Yamamura, whose Verifax Consulting worked on the Target Visa program. "Doing a coalition with them is hard to negotiate."

In the end, Target and Visa got as much value from their smart cards as one gets from a Ferrari in a traffic jam--the technology was sufficient in theory, but it wasn't executed well. "The chips worked, the readers worked, the software worked, and the kiosks worked," Vanderhoof says. "They just never turned on the jets and took off the brakes." Anyone want to buy a preowned smart card system?

Ian Mount is a freelance business writer living in New York.