The network upgrades will enable the processing of chip cards with multiple applications including credit, debit and loyalty programmes and open the way for more secure web commerce, government services and micro-payments for road tolls and parking.

New Zealand has long been the envy of nations for its relatively seamless electronic funds transfer at point of sale (eftpos) environment but slow to adopt next generation terminals and smart cards.

That requires ETSL (Electronic Transaction Systems) Paymark network owned by BNZ, Westpac, ASB and National Bank, and the ANZ National-owned Eftpos New Zealand to adopt more flexible architectures and smarter back-end software to handle the range of applications that could be put to use over the next few years.

These changes, certification of software developers to work with internet service providers (ISPs) and the introduction of smart card capable terminals pave the way for more secure web commerce which is currently following the eftpos curve upwards at about 8 per cent a month.

Another related shift will see a proliferation of smaller terminals designed to empower mobile workers and businesses to take and process payments on the job. All the major carriers are working in this space in partnership with software developers and eftpos providers.

Pressure on to comply

The prime driver for the moment though is for both bank transaction network and merchants to comply with an edict from the major credit card companies to introduce secure chip card capabilities.

Each week about 1500-2000 business people and tourists from Europe and Asia are finding they can’t use their chip cards at our retail outlets and have to revert to swiping the magnetic stripe on their cards to get cash or pay for purchases.

There’s a mandate that by January 2006 all terminals must be chip card capable - software in about 35,000 existing terminals won’t run after that. Another 50,000 terminals will become redundant by January 2008.

The new generation of terminals slowly being rolled out must comply with the Europay MasterCard and Visa (EMV) smart card standards and 3DES (Triple Data Encryption Standard) security standard for payment systems.

However, The Warehouse Group, like other major chains, is concerned it may be forced to upgrade it’s in–house systems to comply with new eftpos requirements without any initial benefits.

Chief information officer Owen McCall admits smart cards are inevitable but unless a suitable ‘chip and pin’ interface can be found to link the ETSL network and the group’s specialist in-house systems a major investment will be required.

The Warehouse Group currently has three different brands of ancient DOS-based point of sale systems which have paid for themselves, and are now seen as extremely cost effective. "As soon as you upgrade to a Windows or even Linux-based approach that will require associated hardware."

Benefit sought before investment

And while card issuers are saying they want all the eftpos systems and retailers to be chip capable before they issue chip cards Mr McCall is asking where the benefits to The Warehouse Group are until that happens.

"Having said that we don’t want to be at the back-end extreme or last people to move either," he says.

The company is keen to move to using smart cards and other leading edge retail applications including radio frequency ID (RFID) but isn’t comfortable being pushed into system upgrades before its done its homework.

There’s also a debate as to whether the point of sales system will be kept separate or a group solution across the red sheds, Warehouse Stationary and the Australian outlets.

Mr McCall is in discussion with network provider ETSL and existing vendors about how they might move the systems forward - a business case will be written later in the year and recommendations made.

The ETSL Paymark-branded network processes about 75 per cent of New Zealand's eftpos transactions. As well as handling debit and credit cards from its four owners it also serves the needs of another 50 loyalty and charge card issuers.

ETSL switched to next generation environment on June 21^st with just an hour of downtime. The five million dollar overhaul so far includes new Tandem NonStop S-series hosts from Hewlett Packard, a complete shift in network architecture, new operating system and application software.

Capacity on demand

Dual servers, for production and back-up, are located at separate data centres in Auckland where the network is outsourced to EDS and TelstraClear. ETSL renewed its multimillion dollar contract for network 10 Mbit/sec infrastructure to Telecom last year and has a deal to increase the capacity based on demand.

The merchant network is still predominantly dial-up at 2400bits/sec using the X.25 packet switch environment, although many larger retailers are using leased lines, virtual private networks (VPNs) or other IP-based networks to streamline transactions to a single eftpos gateway.

The result has been increased performance, capacity and storage and a reduction in maintenance and internal overheads. "Reporting used to take up to eight hours now it’s under an hour. At our peak last Christmas we were running 96 transactions per second we think we’ll be significantly over that this year but have at least three times the capability,." says ETSL business development manager Darryl Roots.

There are about 14,000 EMV compliant terminals in test mode on the Paymark network but the real impact of the change-out won’t be seen until after the January 2006 deadline..

From this point onward card issuers could begin delivering chip cards. "Anyone introducing loyalty applications will have to get them out to terminals and manage remote cards requiring a central point or switch. We plan to play in that space," says Mr Roots. ETSL is in discussion over plans to add the ATM terminals of its shareholders to its network.

ETSL is discussing the way forward with its owners and merchants while evaluating software packages to move forward. It sees itself as a ’total switching environment’ partnering with telecommunications carriers and even the government if it planned a smart card issue.

National Bank to switch

Eftpos New Zealand’s network, owned by the ANZ Bank (acquired by National Bank, a co-owner of ETSL) interconnects with the Paymark network but has its own network and transaction switch.

The ANZ network comprises 400 ATMs and more than 31,000 merchant eftpos devices. It claims to process about 25 per cent of New Zealand's credit and debit card transactions. However with National Bank merchants now informed their processing will move across to Eftpos New Zealand the market is about to become far more competitive.

A spokesperson bank said National Bank was in discussion with shareholders over whether it would retain shareholding in the ETSL network. Merchant customers would be migrated to the Eftpos New Zealand network "as seamlessly as possible" over the next 18 months

"It’s not a small undertaking when you consider the number of terminals National Bank has - it’s a project that needs to be managed and processes developed," says Eftpos NZ acting head of development and implementation John Collins.

"We’re continuing to look at capacity and upgrades and regularly update the application layer to conform with various card schemes and provide additional functionality as the market and business cases demand," says Mr Collins.

Merchants using dial-up can choose TelstraClear or Telecom for communications between terminals and the Telecom X.25 network but leased line customers must use Telecom all the way. A number of customers are using IP to route transactions across their VPNs through the ‘concentrator applications’ into the transaction processing engine.

Loyalty card management

Mr Collins says market changes will require greater interaction between chip cards, terminal and issuer. "The network provider needs to be involved if loyalty type applications are looking to centralise the switching in some way."

While Eftpos New Zealand has done initial work to ensure its terminals are chip card compliant, further development will broaden its ability to work with smart cards. He says it would be logical that both debit and credit card functionality be provided on future chip cards alongside loyalty applications. "The EMV toolkit supports alternative non-financial applications. It’ll be up to the industry and debit card issuers to determine how they proceed," says Mr Collins.

Eftpos New Zealand is currently the largest leaser of eftpos terminals and was first to deploy EMV chip card capable terminals in 2001 when it introduced the eKlick model.

While there are several chip cards in use by different organisations, the ANZ was first in New Zealand to introduce a smart card for banking. The Zed Visa card, which uses Public Key Infrastructure (PKI) to enable business customers to access its on-line Trade Service last year was announced with much fanfare but has kept a low profile since. It provides a unique electronic identifier for each customer and authentication through a central gateway.

The bank is not saying how many are in use, how many transactions are processed using the card or what its future is. On-line users of the smart card need an ANZ supported smart card reader connected to their PC - the bank says 56k is the minimum speed for access but ‘broadband’ is preferred.

Terminal swap out costly

Eftpos NZ handles the Ingenico and eKlick brand of terminals. Other terminal providers in the market include Provenco (formerly Advantage) which provides Hypercom and Keycorp brands, Techtrans which handle Veriphone, Cadmus which provides its own systems, Quest which services many of the oil companies and offerings from systems providers IBM and NCR.

Local terminal supplier and manufacturer Cadmus says its terminals are already EMV and 3DES compliant. "We’re ready to roll out now," says managing director Ian Bailey.

He says New Zealand has an estimated one terminal for every 47 people, that’s more per head of population than most parts of the world. However he’s concerned some smaller dealers are holding up the transition by telling outlets they don’t need to make the change yet.

"That could bring about support issues in late 2005 when there’s a rush to get the job done. It might also be a problem for some customers who find some dealers are not around any more."

Provenco Payments CEO John Tait says the swap-out is a large and costly job but provides a real opportunity for terminal providers to help move merchants into the new era.

Apart from the increased security of chip cards which have an encrypted PIN number you can have multiple loyalty schemes on a card. "At the moment if you are part of a loyalty scheme there’s paper work, a web site to visit and a voucher to redeem those points."

Provenco has about 45,000 terminals installed. The majority of merchants rent their terminals but many have opted to own. Mr Tait suggests rental may be more economical in the future to avoid ongoing software upgrades. "Once we have an infrastructure other people will want to use the power of the terminal and the chip card to deliver other services."

IP faster and cheaper

Mr Tait says IP-based networks give merchants much more flexibility. "You can apply redundancy, route calls in different directions, revert to dial-up if the network goes down or even drop to wireless GPRS or CDMA for mobile applications."

As businesses upgrade their old proprietary infrastructure to IP-based networks, hosted applications are able to run seamlessly across multiple sites - adding eftpos comes as a low overhead investment with tangible savings on dial up or leased line costs.

Triquestra, formerly ALM Systems, is one of the main developers working on retail systems interfaces that not only to take advantage of the new network but access advanced store applications such as smart cards and RFID.

Miles Bland a director and co-developer of the Infinity Retail Management System says his company has accredited 20 different terminal providers around the world to work with the software. Local integration has been completed for Provenco terminals and the company is in discussion with Cadmus.

Among his customers are Barkers, Jean Jones, Pumpkin Patch, Hannahs, Foodstuff South Island and Whitcoulls. "What we have built is a layer of software for different kinds of readers and any other innovation that might happen in the network or terminal base." says Mr Bland.

Mr Bland says the trend to IP means eftpos is now available at much higher speeds. "The big thing is not the price of the transaction but the timing. Dial up eftpos takes about nine seconds but over IP it takes three seconds. If you were a supermarket taking a thousand transactions a day you’re saving 6000 seconds of waiting time at the checkout and the processing time can be even faster if companies have good workflow practice."

The role of the network he says is to enable people to buy products as quickly as possible so they spend the least amount of time standing at the checkout. "The terminals and back-end systems should give the retailer absolute control over the financial transactions and inventory. The underlying plumbing and should be secure and resilient but essentially invisible."

The growing market demand is for IP-based access to the bank networks which significantly lowers the cost of dial-up and leased line connections is showing up the weak link as Telecom’s ancient Pacnet X.25 network, also known as Telecom Transaction Services (TTS).

Both bank networks and other industry participants are actively working with Telecom to move the communications to a new IP-based network.

Telecom data products manager Sally Holloway says components are no longer being manufactured for the platform on which X.25 services are built and Telecom is looking at market trends and possible replacement technologies.

 She says Telecom Advanced Solutions (TAS) is working on replacement options including CDMA, WiFi and DSL broadband.