Chip-based payment cards have had a spotty record at best, in large part because acquirers are skeptical of investing in the infrastructure to accept the cards. But the U.S. Navy is using the captive audience aboard its ships to implement a chip-based, cashless debit card payment system that will result in the mothballing of its fleet of 200 automated teller machines on 175 ships.
  Sailors have used the ATM cash to purchase items in the ships' stores and at vending machines. The ATMs are connected to a closed-loop, shipwide network. Offshore, sailors use their own, commercially branded debit cards for cash access.
  Now, though, the Navy is issuing its own debit card, called Navy Cash, that has both a smart chip for use on ships and a magnetic stripe for on-shore use. "We explain it as 'chip on ship, stripe on shore,'" says Barbara Straw, director of the disbursing division for the Navy Cash programming office.
  So far, 16 ships, including the aircraft carriers U.S.S. Harry S. Truman and U.S.S. Ronald Reagan, have installed the Navy Cash system. More than 25,643 Navy Cash cards have been issued, and 5.7 million transactions have been processed. On the Harry Truman, which has a crew of 5,000, sales exceeded $1 million on a recent voyage, says Cmdr. John King, the ship's supply officer.
  Implementation of the Navy Cash program will be finished by 2008. The Navy plans to use its ATMs, currently maintained by NCR Corp., for spare parts, says Straw.
  The chip function supports an electronic purse that stores pre-selected value from a sailor's paycheck. Value is debited when the card is inserted into a chip card reader connected to a computer system aboard the ship, says Straw.
  Personal identification numbers are keyed in to identify the user, who also can manage value on the card from a host bank account, she says.
  When ships are at sea, the Navy uses a batch-transaction process instead of online authorizations when settling with host banks.
  Value on Navy Cash cards can be accessed at ATMs and eventually point-of-sale terminals while ships are in port by using the card's mag stripe. PIN-debit networks supporting the card are Pulse, NYCE and MasterCard International's Cirrus and Maestro brands.
  New York-based J.P. Morgan Chase & Co., which has an agent-bank relationship with the U.S. Department of the Treasury, is the card's agent bank and network gateway for on-shore transactions, says Straw. Chase also holds the card program's pooled funds. The cards can be deactivated if cardholders add value without having sufficient funds in their commercial bank accounts, she adds.
  The Navy several years ago experimented with real-time debit authorizations for automated teller machine and point-of-sale transactions using satellite communications links with networks. However, the equipment needed for such rapid two-way transmissions did not fit the Navy's priority communications needs, Straw says.
  Branded prepaid debit cards, such as those marketed by Visa International, were rejected because the cards come with no reimbursement guarantee in the event of theft or loss. Navy Cash cardholders are liable for no more than $25, says Straw.
  The Navy Cash cards are expected to cut in half cash needed aboard ships and cash-handling costs by 30%, says Straw. An aircraft carrier, for example, carries as much as $5 million, some of which is used to purchase supplies while overseas.
  Reducing Costs
  Cashless transactions aboard Navy ships are a good idea because they reduce the cost of carrying, and counting, cash, says Hank Neill, president of the American Military Banker's Association, a 40-member association of financial institutions that have a high concentration of military personnel depositors. "The idea is to get cash off of Navy ships," he says.
  However, Neill says, military banks would have preferred leaving the mag stripe off the Navy Cash card so personnel must use commercial bank cards on shore. The issuers stand to lose the foreign fees they typically get when their cardholders use other deployers' ATMs. Sailors could potentially use the Navy Cash cards as a fee-free replacement of commercial cards, he says.
  Straw agrees that financial institutions will not get foreign fees if the cards are used for on-shore transactions. However, the Navy had to provide a way for personnel to conveniently access their own card funds, she notes.
  Surcharges imposed by ATM owners on shore and cross-border debit fees still apply. The mag stripes thus far have been used to support about 15% of the card transactions, says Straw.
  Each military branch is expected to have its own chip-based payment card program that can be used interchangeably, says Straw. The Navy is purchasing chip card readers from Australia-based terminal maker Keycorp but will use other vendors as the Navy Cash system progresses, she says.

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