Here's how smart cards--plastic cards that store information on an internal microchip--can help small companies learn about their customers' purchasing behavior and reward customer loyalty.
Techniques: Killer Tools
Small companies are playing with a full deck of smart-card applications
As a former restaurant owner, Michael Cutter was all too familiar with the problem that was plaguing Super Wash, his Phoenix-based chain of coin laundries. "You do 70% of your business on nights and weekends, and you'd love to do more on your slow days," he says. The obvious solution was an off-peak discount. But just try teaching that trick to a mechanical coin slide.
So Cutter was spinning with excitement when he found a way to get coins out of the coin-laundry business. Today, Super Wash customers at half of the company's 17 Southwest locations pay for their loads with smart cards: pieces of plastic that look like credit cards but contain computer chips. Vending machines exchange bills for cards loaded with electronic cash; customers then slide those cards into washers that deduct the cost of each load. Now Cutter is in the process of installing the machines at his remaining laundries.
Smart cards have freed the 10-year-old, $4-million company from fixed prices and 25¢ increments. With the cards, Super Wash, which now charges $1.89 for a family-size load (drying included), can offer 40% discounts on every wash between midnight and 6 a.m. The discounts have raised the number of loads each machine handles daily to nine--double the industry norm--generating, on average, 50% more revenues for each location. By themselves, those results justify the $35,000-per-store cost of the technology, from Schlumberger Danyl (609-234-8000). And with no coin slides to jam, Super Wash has reduced maintenance costs by 70%. "That was a bonus," says Cutter. "The main thing is how much downtime on machines we save."
Unlike magnetic-strip cards--such as credit and ATM cards--smart cards process and store data internally, on a microchip. That means companies using smart cards can eliminate the cost and risk associated with real-time connections to a central computer. "We looked at other systems with centralized control and backup," says Cutter. "But if they go down on the weekend, which is when we make our money, we can't wait till Monday morning to get them fixed."
The downside of storing information in people's pockets, of course, is loss of control. Since data aren't collected on a central server, card issuers can't pull up customer information and analyze it for trends. Super Wash gets around that by downloading transactions from its washing-machine readers onto a PC every few weeks. It can then mine the data for nuggets like how a washer's distance from the door affects its usage. Unfortunately, there's no simple solution for the problem of lost cards: if a customer's Super Wash card goes missing, he or she loses whatever money was on it.
The idea of sandwiching a microchip between slices of plastic dates back to 1974, when French inventor Roland Moreno received the first smart-card patents. Saddled with an inefficient telecommunications infrastructure, Europe quickly adopted the technology--which can authorize payments off-line--for use in phone and bank cards. In the United States, however, large-scale trials of smart cards have failed to generate much interest, most likely because consumers here already enjoy a dazzling array of payment options.
But the cards, pressed into service by creative companies looking to tighten their bonds with customers, are beginning to catch on for other applications. And their use will likely increase as the technology becomes ubiquitous. William J. Barr, president of the Smart Card Forum and coeditor of Smart Cards: Seizing Strategic Business Opportunities (McGraw-Hill, 1997), predicts smart-card readers will become widely available on new PCs sometime next year. That would make smart cards even more affordable for small businesses that want to "identify their customers, acquire information about purchasing behavior, and reward customers for their loyalty," he says.
Jim Brakebill wants to do all those things, but mostly he wants to keep his customers away from the large drugstore chains with which he competes. So in 1995 the owner of Jim's Tower Pharmacy, in Oklahoma City, joined a citywide program in which local doctors, hospitals, ambulance companies, and pharmacies record their customers' medical histories on smart cards, called Medicards. Information about every diagnosis, operation, and prescription, as well as insurance data, notification of allergies, and emergency contacts, is loaded onto the Medicard, which can be issued by any of the participants, and which customers carry with them. The program's goal is to provide integrated care without building a centralized patient-tracking system.
For Brakebill, the Medicard is also a powerful sales tool. "Patients bring their bottles in to have me put that information on a new card, and sometimes there are medications I didn't know they were taking," he says. "Just having the dialogue with them, you find out there's business you didn't even know about." He estimates that such leads have boosted his sales by 5% a year since he joined the program. "It's not that I picked up so many new customers," he says. "It's that I captured more of the business of the customers I already had."
To get up and running, Brakebill spent $300 for a smart-card reader from Precis Smart Card Systems (800-917-6278), the company that administers the Medicard program. The reader, which is about an inch thick and the size of a postcard, connects to Brakebill's PC; he uses it with an on-screen form to update cards every time customers change insurance carriers or drug dosages. He also pays $10 a year to Precis for each card that he, personally, issues, for which he then charges customers a $15 annual fee. But sometimes he just gives the cards away. "I'll say, 'If you bring in your mother and she transfers all her medication over here, I'll give her the card free.' That's maybe a $10 cost to me, but if she's got 10 prescriptions a month, I'm going to make that up on the first fill."
Like Brakebill, Phill Porpora worries about customer loyalty. As co-owner and vice-president of Lee Auto Parts, a family-run chain in Chicago's northwest suburbs, Porpora sees smart cards as a way to protect the $20 million in annual sales his company makes to independent garages and do-it-yourselfers, and to compete against superstores, like AutoZone, that are muscling their way onto his turf.
Last March, Porpora launched the Lee Auto Parts Smart Card, which rewards purchases with points redeemable for gifts and discounts. Porpora got the idea from the bar-coded frequent-shopper cards used at local supermarkets. Those cards, however, require a connection between the cashier's scanner and a remote database to add or redeem points. To avoid the expense of setting up local area networks at his 12 stores, he teamed up with Smart Card Solutions (888-225-6442) to build a loyalty program around a smart card. "Since it has a microchip," he says, "it can actually hold the points in the card."
Customers pay $5 for the card, which arrives in the mail along with a $5 gift certificate. After that, cashiers load one point onto the card for every dollar spent. A thousand points earns a $25 gift certificate.
Now that Lee Auto Parts has experience using smart cards to compete with the big guys, Porpora wants to help the little guys, specifically, the mom-and-pop garages that buy from him wholesale. His plan: print cards branded with the logos of those garages, which would then issue them to their customers as part of their own points programs. "There would be a tie-in where we would make their business better," Porpora says.
Merchants in Cache County, Utah, meanwhile, use smart cards to promote their businesses to families. "I don't know about the rest of the world," says Tracy Hoth, co-owner of the Juniper Restaurant, in Hyde Park, "but here in the valley, parents want to support their kids' education."
In June, Hoth's family restaurant began accepting the Kids Card, a smart card issued by IC One (801-355-0066). The card program lets patrons designate up to three schools to receive a portion of every purchase. "We always get people coming in asking for money for every school function: the choir, the football team. That's $25 here, $50 there," says Hoth. "We'll still help with some of that, but now we can say we're doing the Kids Card, and it's up to the schools to distribute the money."
Every time a Juniper diner presents the Kids Card, Hoth slides it into a reader and types the amount of the bill on an attached numeric keypad. The reader, which contains both memory and an internal modem, records the transaction, notes which schools the patron has selected, and earmarks 6% of the tab as a donation. (Each merchant sets the amount he or she wishes to give.) Then once a day, Hoth modems the donation information to IC One, which moves cash from Juniper's bank account to the schools' accounts.
IC One gives 50% of each donation directly to the schools. In addition, the reader loads 20% back onto the Kids Card in the form of "EduCents," which the card holder can spend on things like lunches and books at the schools themselves. (Most schools participating in the program have at least one reader.) Card users without school-age children can pass their EduCents on to friends or relatives, or donate them to specific groups, such as the band or the debate team. IC One keeps 9% to cover the cost of the program. Two percent goes to foundations and school-board associations, and the remainder goes to independent reps who sign up schools and businesses.
The cost to Juniper is so low--just a $25 monthly rental fee for the reader--that the restaurant can't lose. "We're expecting big things out of it," Hoth says. "But even if it only brings in another two or three customers a month, it would pay for itself."
Applications like the Oklahoma City Medicard and the Kids Card don't cost businesses much, because infrastructure costs are shared among merchants, consumers, and public institutions. But that raises a question: If smart-card programs are so cheap and easy, won't everyone eventually use them, causing their competitive advantage to evaporate over time? That's all the more reason to become an early adopter, according to some experts. John Frank, editor-in-chief of Card Technology magazine, predicts that smart-card pioneers will enjoy the same long-term benefits reaped by companies that were quick to set up shop on the Web. "Smart cards are relationship builders that can lock in customers," says Frank.
And customers aren't the only targets for smart cards. Chemco Electrical Contractors, a $20-million company in Alberta, Canada, plans to give them to its employees. Chemco sends skilled electricians to jobs at industrial sites in Alberta, such as Syncrude Canada's oil-sand mines. Before workers head out on assignment, Chemco has to make sure they've taken the required safety-training courses. "We had a paper-based system, but it wasn't always accurate," says Dave Hagen, Chemco's safety coordinator.
With courses run by numerous unions and training companies, networking everybody to a central database was simply too expensive. So starting early next year, all of Chemco's contract workers will begin carrying the Construction Safety Training Passport, a smart card that holds their training records. When Hagen gets a request for someone with, say, hoisting and rigging training, he will be able to verify instantly that a candidate has the appropriate courses under his or her belt. "I just take their card, I throw it into the computer, and I get a record of everything they have," says Hagen.
The other beneficiaries are Chemco's customers, who lose time and money every time a contract employee is mistakenly turned away from a work site. "If you're carrying a paper card to prove you've got H 2S"--that's hydrogen sulfide awareness training--"and the guard can't read it because it's got a smudge, he's going to tell you to get a new one," says Art Riendeau, computer-based training marketing manager at the Alberta Construction Safety Association. "And in a place as isolated as northern Alberta, that's not so easy."
Andrew Raskin is a freelance journalist based in New York City.