Digital Transactions Authoritative, insightful and timely information for payments professionals
A small San Diego company is working on a new type of transaction card that combines the characteristics of a compact disk and a mag-stripe card, allowing consumers to perform both credit and debit transactions online as well as at physical points of sale. U.S. Encode Corp., incorporated in 2002, is putting the finishing touches on its design of the credit-card-sized device and says it will be ready for production later this year, possibly by as early as the second quarter. Meanwhile, the company has already launched a pilot with an unnamed bank in Australia involving a separate device that works in the CD-ROM drive of personal computers but does not have a mag stripe. This device, which the company calls its companion card, is is intended for online use only. Don Ceglar, chairman of U.S. Encode, says the pilot, which is testing the device as an authentication tool for online banking, is starting with 100 units but is designed to grow to 1,000. He adds the company is in talks with two organizations interested in testing the companion card and ultimately the combination CD/mag-stripe card. He won't name them, but says they are “extremely large institutions involved in payments.” While companion cards can be any size or shape, the newer device, which the company calls a replacement card, will replicate not only the size but also the thickness of a credit card. A CD on one side and a conventional card on the other, this product required years of development. “This was the most difficult part of the development process,” says Ceglar. “We must have a card that spins in all drives, that reads, and is durable.” Ceglar sees demand coming from banks and brokerages for online authentication as well as from banks and merchants for credit and debit transactions. Since its product can function as a PIN debit card, U.S. Encode is keeping an eye in particular on Internet merchants' appetite for a transaction device that serves as an alternative to high-cost credit cards. A number of companies are working on such alternatives. ATM Direct, Irving, Texas, for example, has developed a product that allows consumers to use PIN debit for e-commerce, and the unit of San Francisco-based Pay By Touch Inc. has worked out a pilot with at least one electronic funds transfer network (Digital Transactions News, Dec. 16, 2005). “That's a very hot area,” Ceglar says. “The ability to get around the interchange fees or reduce them is a big driver.” Guidelines released last fall by the Federal Financial Institutions Examining Council (FFIEC), which said banks should move to multi-factor authentication technologies, have also helped spark interest. “There's been a very dramatic uptick in interest and discussion from the online banking community,” says Ceglar. “Banks are clearly taking these guidelines as more an obligation than a recommendation.” Both the companion card and the replacement card run in CD-ROM drives for e-commerce payments and automatically initiate transactions. When a user is ready to pay for an item online, he inserts the card in his drive. Software embedded in the card generates on the user's screen a touch-sensitive PIN pad. The user enters his PIN or password, then proceeds with checkout. The device must remain in the drive throughout the transaction. What goes on behind the scenes, Ceglar says, involves a proprietary process (U.S. Encode has five patent applications before the U.S. Patent and Trademark Office, with a sixth on its way). In over-simplified terms, U.S. Encode software on the issuer's server authenticates the user from the PIN, then sends an authorization message to a separate server to initiate the transaction. “There's a lot more routing that goes on, but you don't want to show how the sausage is made,” Ceglar says in declining to be more specific. The cards, which are copy-protected, do not store PINs. Ceglar says cost will be critical to successful commercialization. Since the company expects large banks will distribute cards to customers at no charge, it is working to get the device cost under $1 per unit at volume. Its software, Ceglar says, will license on a per-user basis, also at less than $1 at the low end. Ceglar says he expects the products will be fully commercial within a year. Current head count, at eight, will at least double in that time, he projects.
