A High-Tech Card Maker Aims for ‘Holy Grail’ of Transaction Cards

Innovative Card Technologies Inc., a 15-year-old maker of high-tech bank cards, expects to have pilots under way with U.S. financial institutions by the end of September for its primary product, a credit-card-sized device that generates a one-time pass code for online transactions. Steven R. Delcarson, chief executive of the Los Angeles-based company, tells Digital Transactions News the pilots, which will involve unnamed Visa Inc. and MasterCard Worldwide banks, will start with bank employees but rapidly progress to customers. A commercial product for the U.S. market, he says, is likely in 2009. “All indications are that in the first half of next year there will be real deployments starting to happen,” Delcarson says. With headlines appearing nearly daily about online fraud, data breaches, and skimming of debit card PINs and account numbers, banks are showing signs of wanting to act fast on transaction security, Delcarson notes. Banks are also looking to convert increasing numbers of customers to the lower-cost online channel, which is putting more pressure on the institutions to beef up security. All of this, Delcarson says, is creating nascent demand for Innovative's ICT DisplayCard, which features a window in the upper right hand corner that displays the six-digit one-time code to authenticate each transaction. “There's strong interest and urgency to get to market with this,” he says of the expected pilots. With one-time pass-code authentication, a consumer making an online transaction uses a device to generate a code that is good for that transaction only. To authenticate himself as the owner of the card, he enters the code displayed by the device. The code, if authentic, should match one generated by the e-commerce vendor. Up to now, most of these devices have been key fobs, such as those from RSA or VeriSign Inc., rather than credit card form factors. Innovative's product, which contains a battery, one or more chips, circuitry, and other components in a card with the same dimensions as a mag-strip card (including thickness), is already in commercial use with Charles Schwab & Co. Inc. for online brokerage and with banks overseas for online banking. Most recently, Innovative signed a deal with card-manufacturer Gemalto to supply an undisclosed number of cards that Gemalto will customize for its clients. Innovative has similar arrangements with more than a dozen other companies, including RSA and VeriSign, which this spring began supplying Innovative's card to PayPal Inc. for customer use. In April, EMC Corp., RSA's parent company, invested $5 million in Innovative. Delcarson hopes the planned pilots will help his company establish the case for card-based authentication with one-time pass codes (OTP) in the U.S. as well as for his card as a mainline transaction device. Innovative's largest U.S. banking client is Bank of America Corp., though Delcarson will not reveal the institutions that will be participating in the pilots. “What I see as the Holy Grail is turning [the DisplayCard] into an ATM or debit card,” he says. “It's the Holy Grail because of the massive market opportunity. Think of all the people who have a bank card in their pocket. It's a pervasive form factor.” He argues the ubiquity and convenience of cards will lead banks to prefer cards to key fobs for OTP authentication. The company faces some challenges. It is running in the red, having racked up a $1.96 million loss in the first quarter, though this is down from $2.21 million in the year-ago period. It had $217,000 in revenue, nearly all of it from sales of the DisplayCard. “Our continued existence is dependent upon our ability to generate sales of the ICT DisplayCard or, if we are unable to do so in sufficient quantity to cover our expenses, to obtain additional financing,” the company notes in its first-quarter report to the Securities & Exchange Commission. Another issue could be the cost of the DisplayCard. Delcarson refuses to say what the manufacturing cost is, but notes that resellers price it between $17 and $50 apiece, compared to around 50 cents for a conventional mag-stripe card. Delcarson argues that the cost will fall over time. He also argues that banks will have to be prepared to make larger investments to fend off fraud and to shore up consumer perceptions of security. “If banks truly want to incorporate security for the customer, that's a whole new mindset [for them],” he says. Banks could recoup at least some of the cost through annual fees or by selling the card to customers, he says. Customers who want peace of mind, he says, will pay a reasonable fee. “If they charge me $25, I'm going to pay $25,” says Delcarson, who says he was himself once the victim of a hacker who used his online-banking credentials to steal thousands from his account.