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Smartcards: key to a checkless, cashless future

This article appears in the issue September 2000 [Volume 9, Issue 7]

After a number of false starts in the United States, the smartcard is beginning to emerge as one of the major e-commerce tools of the future. Identical in size and feel to magnetic stripe-based credit cards, a smartcard stores information on an integrated microprocessor chip embedded within a plastic card.

With its relatively powerful processing capabilities and a storage capacity 80 times greater than contemporary magnetic stripe cards, a smartcard can be programmed to make complex, rule-based, data-dependent decisions. The chip on the card is either a microprocessor with internal memory or a memory chip with non-programmable logic. The chip connection occurs by direct contact with the card or without contact, through an electromagnetic interface. Think of a smartcard as a computer that looks like a card.

Smartcard chips can hold a variety of data, depending on the transaction set, from stored cash used for retail and vending machines, to secure ID and high-end applications for operations such as banking transactions and medical/healthcare records. A single smartcard, for instance, can be used to buy an airline ticket, store it digitally and track frequent-flyer miles. With a smartcard, consumers gain the capability to carry multiple currencies when traveling; make secure purchases over the Internet anytime, anywhere; pay for public transportation and public phone calls; and make traditional credit and debit purchases.

Smartcard technology has been around since 1974, when a French inventor, Roland Moreno, patented the first Smartcard payment system. It was called TMR, which appropriately stands for "Take the money and run." Revolutionary in its day but impractical by today's standards, the TMR system required three cards to operate: a merchant card allowing the business' bank to identify it, a blocked payment card that contained the list of deadbeat accounts and the customer card.

Smartcard technology has come a long way since 1974. Just like a computer, today's smartcard microprocessor chip contains an input/output port, operating system and hard disk, with chips available in 8-, 16- and 32-bit architectures. Data storage capacity ranges from 300 bytes to 32,000 bytes, with larger sizes expected as semiconductor technology advances. The capability to download executable applications in addition to data is being advanced by Sun Microsystems with JavaCard technology and Mondex with Multos.

Smartcard applications such as phone cards or "electronic wallets" require only a memory chip. A memory chip is like a small floppy disk with optional security. Memory chip cards can hold from 103 bits to 16,000 bits of data. They are less expensive than microprocessor-based cards but suffer a corresponding decrease in data management security. They depend on the security of the card reader for their processing and are ideal when security requirements permit the use of cards with low to medium security.

Smartcard applications

Since 1998, the smartcard industry has been growing at the explosive rate of more than one billion cards per year. Major high-volume smartcard opportunities include the following applications:

• phone cards--More than 100 countries use reloadable smartcards instead of coins for their pay phone systems. Germany, France, the United Kingdom, Brazil, Mexico and China have extensive programs.

• mobile phones--More than 300 million GSM mobile telephones have smartcards that contain security and subscription information. The handset is personalized to the individual by inserting the card that contains its phone number on the network, billing information and frequently called numbers.

• satellite TV--Almost every small-dish TV satellite receiver uses a smartcard as its removable security element and subscription information. There are more than 4 million of them in the United States, and millions more in Europe and Asia.

• financial services--The financial industry has been quick to adopt smartcard technology worldwide. For instance, all French Visa debit cards--more than 25 million of them--have a chip in them.

• banking--In Portugal and Singapore, the national banking networks have launched electronic purse projects. In the United States, American Express has a smartcard for use in ATM banking transactions.

• healthcare--Various countries with national healthcare programs have deployed smartcard systems. The largest is Germany, which deployed more than 80 million cards.

• government and military--Smartcards can store information about individuals, such as fingerprints and other physical characteristics. Consequently, they have been adopted for identification purposes by all major governments and military worldwide.

Other applications for smartcards include computer/Internet user authentication, retailer loyalty programs, resort cards, mass transit, electronic toll, product tracking, national ID, drivers licenses, passports and student ID cards that serve multiple functions: dormitory key, parking lot key, cafeteria pass and medical record archive. The list goes on.

Technology convergence aids smartcard deployment

Despite the worldwide interest in smartcard adoption in the United States, where telephone costs are low and magnetic-stripe credit cards are the plastic of choice, Americans may appreciate the technology, but to date, they have shown little interest in smartcards. Analysts estimate only 2% of all smartcards are used in the Americas, while Europe claims 90% market share. Like the ATMs before them that took a decade for consumers to adopt, it could take years before smartcards reach widespread use in the United States.

Telephone credit card numbers can be dialed up over a phone line, drivers licenses are the nationally accepted form of identification, more and more online transactions are conducted via PC every day, and credit cards are used extensively to conduct ATM and point-of-sale transactions.

It is the use of credit cards, or more accurately the use of magnetic stripe cards, that presents the biggest obstacle to smartcard adoption in the United States. Smartcard adoption on a grand scale would require a massive retrofitting of the magnetic stripe and ATM infrastructure that has been built up over the years; that could cost as much as $30 billion, according to some estimates. Banks would have to fund the retrofitting operation and find some way of passing on the cost to the consumer.

Standards are another issue. Adopting them would ensure interoperability of cards in machines from different suppliers and would seem to be mandatory, particularly because America is essentially starting from scratch. Amex, VISA, MasterCard International and Europe's Europay are working on a common format.

At present, three major technology forces have the potential to trigger widespread adoption of smartcards. They are PC adoption, the Internet and the existing ATM banking network. Not surprisingly, even as those three widespread systems are linking up with smartcard technology, the systems themselves are on track to converge with one another in the not-too-distant future.

Because many a smartcard comes embedded, in effect, with its own computer, it would almost be unnatural if smartcard and PC worlds did not converge. Moreover, the timing is fortuitous. The PC market still has a way to go to achieve its installation potential. Fitting PCs for smartcard use would not be difficult; in fact, smartcard-enabling could conceivably speed up the adoption of PCs.

The pieces are already starting to fall into place. Many PCs, keyboards and WebTVs will be shipped with smartcard readers during 2000. Microsoft, Hewlett Packard a


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