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Popular Smart Card Tutorial By Dr. David Everett
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Why Pre-Authorised Debit Could Enable Truly Cash-less Transactions

The payments industry has been searching for the crucial revenue generating application that resolves the 'open purse' conundrum; one that enables innovative payment methods to be established, new cardholders to be embraced, and that takes advantage of the industry's extensive investments in EMV. To date, the banks have explored a variety of applications, but each of these uses just one of a number of competing technologies, making universal introduction expensive and almost impossible to achieve. However, there could be a resolution that overcomes these challenges, opening the way to a wealth of new opportunities - Pre-Authorised Debit (PAD).

The PAD payment system has the capability to address a number of key requirements. Card scheme members can offer their customers national currency, e-purse-like products that can be associated with debit and credit products. In addition, they will be able to build on the rollout of EMV chip-enabled cards, to provide a single currency payment system that can be targeted at both the banked and unbanked population.

In addition to being able to support both the on-line and predominantly off-line payment environments, the PAD payment system offers true system integrity and acceptable risk management thresholds. Finally, settlement and clearing between participating banks is undertaken using existing procedures that have long been established by the international card schemes.

The PAD payment method provides electronic purse-like features based on the EMV debit and credit specification. Unlike the competing electronic purse schemes tried by a number of banks, EMV has the inherent advantage of being designed to be interoperable and internationally accepted, which means PAD will work within other EMV-based national card systems. It also enables banks to take advantage of the banks and retailers' infrastructure investments and, because it utilises the EMV technology as a platform, it is secure for cardholders, acquirers and issuers, making it ideal for other payment environments such as the Internet, e-commerce and m-commerce.

With PAD, the achievement of a cost-effective single currency payment system that is smart card-based and viable for both banked and unbanked users becomes a reality. Named customers – those linked to bank accounts – can take advantage of a secure, personalised low-value debit payment method, optionally secured by a PIN that is capable of enabling off-line cash transactions as well as direct fund transfers from the user's account to the card.

The PAD payment system can also be accessible to those in the population that do not have a normal bank account through the provision of an "anonymous" payment card. By simply associating the card with a unique numbered holding account, banks can securely load values onto cards using on-line terminals in exchange for a cash payment (effectively putting a deposit on the card).

Bank branches and other authorised locations will be able to operate on-line value-load devices. Once loaded, cardholders can undertake purchases and merchants simply deduct payments from the balance held on the card itself. Once the balance is exhausted, a cardholder will once again need to 'recharge' its value at an on-line terminal.

So how will this operate for retailers? Point of sale (PoS) devices can use the standard EMV kernel application. The merchant terminals will be able to approve transactions based on the available card value; updating balances automatically and providing off-line balance enquiries. Clearing and settlement procedures will utilise defined processes already in place for standard credit or debit transactions. Therefore the merchant end-of-day process automatically initiates PAD settlement between the retailer and the acquiring bank.

The PAD application does not require any online authorisation for a purchase, making it ideal for environments where telecommunications are difficult or expensive to implement. All transactions are 'authorised offline', generating an EMV transaction certificate, which also provides the audit trail.

This gives us an interesting option for some totally offline merchant sites to transfer transactions to a memory card for presentation at their acquiring online bank; each memory card becomes a virtual terminal with a unique ID to support central verification and value assignment. For totally offline merchants, the bank uses its branch terminal to read transaction records from the merchant card, using normal EFTPoS submission processes to transmit transactions to the clearing centre for posting against individual retailer accounts.

This offline technique brings other potentially interesting applications for PAD. In the vending arena, it could eradicate the risk of cash theft from machines storing cash and, with the growing interest in Internet, e-commerce and m-commerce, PAD will also be able to provide secure, authorised, low-value transactions within these payment environments.

The PAD system opens the way forward to a new world of payment opportunities and overcomes the issues of implementation and solution-proofing by adopting EMV-based technology that ensures banks are not tied to a single card type or platform. And because PAD complies with EMV, it can operate with other EMV-based national debit card systems. Transactions are easily switched between participants, with full reporting on all transactions that are processed through the switching process.

For banks, PAD offers a payment scheme capable of supporting low-risk products for a new customer base not familiar with, or trusting of, banks. For retailers, the system uses an EMV-enabled PoS device and removes the risk from transactions by guaranteeing that funds are available, providing PIN-based identification at the PoS to verify cardholder authenticity.

The PAD system could overcome all the business issues associated with providing cash-less transactions by providing banks and retailers with a cost-effective route that takes advantage of existing infrastructures to undertake transaction reconciliation and distribution in a secure fashion.

This is no 'pipedream'. MasterCard and Visa are already in the process of implementing plans to support PAD as an extension to the credit and debit services supported by EMV. The payments industry has long sought a crucial revenue-generating application that could create a rapid return on investment in EMV. With PAD, the search may well be over.