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Smart cards are coming to a wallet near you

July 2, 1998
Web posted at: 9:30 AM EDT

by Tom Diederich

(IDG) -- Smart cards are making some headway in U.S., mostly for applications involving database access. A handful of pilot projects are pointing the way to the cards' broader use.

Already widely used in Europe for almost a decade, a smart card - with its embedded microprocessor - can start your car, pay your highway tolls, let you into your office, provide secure access to your company's database, allow you to make purchases and even place calls from anywhere in the world on your portable phone.

A smart card can securely store as much as 500 times more data than traditional magnetic-stripe cards.

But the U.S. is behind the rest of the world in adopting these cards. Last year, only 10 million smart cards were used in North America, compared with 684 million units used in Europe, according to research firm Frost & Sullivan in Mountain View, Calif. Shipments to the Asia-Pacific region totaled 124 million, and those to Africa and the Middle East hit 105 million.

Ironically, one reason for shunning the smart card has been the advanced telecommunications system in the U.S. In countries with wobbly or antiquated telecommunications systems, smart cards offer secure and affordable off-line transactions. In Latin America and some areas of Asia and the Pacific, Frost & Sullivan forecasts "tremendous" growth. In 1993, for example, the company said smart card-related revenue totaled $31.5 million in Latin America. By 1996, that figure more than doubled to $75.1 million.

No strong need

"It's so fast and inexpensive to authorize online transactions in the United States that there isn't a strong need today to move from mag-stripe cards to chip technology," said Edward Dixon, a spokesman for MasterCard International, Inc. MasterCard's competitor, Visa International, Inc., estimates that $3 billion will be needed to install a smart-card infrastructure in the U.S. alone.

Smart cards are used mainly in the U.S. with secure database access, according to John Dunkle, an analyst at Workgroup Strategic Services, Inc. in Portsmouth, N.H. In fact, database security applications alone will be responsible for a projected doubling of smart-card usage in this country by the end of 1999, according to Alyxia Do, an analyst at Frost & Sullivan.

Frost & Sullivan's breakdown of last year's worldwide smart-card market showed that prepaid telephone cards accounted for 75% of all applications. The remainder of the market consisted of ID cards, at 9%, Global System for Mobile Communications digital phones at 6%, banking 5%, pay TV 3% and transportation 2%.

There are two types of smart card: contact and contactless. Contact smart cards, which must physically pass through an electronic reader, are the most widely used.

For their part, contactless smart cards have an embedded antenna coil that enables them to communicate with remote receivers and transmitters. One example of a system utilizing contactless smart cards is New York's E-ZPass electronic payment system, which allows motorists to pass through special lanes without stopping to pay tolls. In Europe, contactless smart cards are also used as ski passes.

But the benefits to commerce will eventually make them the platform of choice among major financial institutions such as MasterCard and Visa, probably within the decade, according to Do. Those benefits include a drastic reduction in fraud because of the high degree of security the technology provides, she added.

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Millennium roadblock

Another roadblock slowing the pace of adoption here is the millennium bug, said Rob Enderle, an analyst at Giga Information Group in Cambridge, Mass. "Probably the biggest damper on smart cards right now is the fact that the people who are deploying them are the same people very often who have to address year 2000 issues," he said. The computer glitch is eating up budgets "that they would otherwise use for smart cards," he added.

Still, there are some signs pointing to broader use of the cards. Several pilot programs under way in North America provide a glimpse of what to expect in the coming years.

Schlumberger Smart Cards & Terminals in New York and Quebec-based Cyberpro Technologies, Inc. recently gave each of the amateur Quebec Soccer Federation's 120,000 members a smart card loaded with promotional offers from McDonald's restaurants, a video rental chain, various sporting goods stores and a line of hotels. All participating outlets received a Schlumberger MagIC 9000 reader to process the cards and track purchases, the companies said. The cards are being used by players at selected tournaments.

On New York's Upper West Side, the success of a pilot program that began last October has yet to be determined. The New York Smart Card Program was designed to gauge how shoppers and merchants would respond to "an alternative to cash for everyday purchases."

The program's joint sponsors - Citibank, Chase Manhattan Bank Corp., Mastercard and Visa - issued 80,000 smart cards that act as "cash" for small purchases - generally less than $10 - at local stores. The program, originally scheduled to last six months but now extended until year's end, has met with mixed reviews so far.

But these programs are no panacea, some say. In the New York program, "lose the card and you lose your money," said Bill Mangino, president of Product Technologies, Inc. (PTI). "The only way smart cards are going to be successful is if they're better than money, not as good as money," he said. PTI, in Middletown, Conn., supplies smart-card based applications to systems integrators including CyberMark LLC in Tallahassee, Fla.

Security pros and cons

Like ATM cards, smart cards can be programmed with safeguards such as personal identification numbers (PIN) to prevent thieves from making off with your cash. In Oklahoma, the U.S. Army's Fort Sill has a smart-card program where finger print-reading scanners verify that the user is in fact the rightful owner.

But unlike ATM cards, lose your smart card - in cases like the New York program - and you lose your cash. That's because a monetary value has been downloaded onto the chip itself. One way to make smart cards "better than cash," Mangino suggested, would be to require a PIN or fingerprint confirmation for purchases over a certain amount, like $10, for example. Once the $10 or $15 stored on the card has been spent, the holder could download more from an account via the Internet or a bank machine, he added.

Other smart-card pilots include some at U.S. universities installed by Tallahassee, Fla.-based CyberMark. At Florida State University, for example, students and faculty have ID cards that give them access to most campus services but also act as an "electronic purse."

Students use the cards to enter their dorms, pay for books, wash clothes, make long-distance calls, pay for meals and buy goods at local stores, said Chris Corum, director of systems marketing at CyberMark. Some schools, such as Villanova University in Villanova, Pa., partner with financial institutions for additional services such as an ATM function, he added.

But the future for smart cards isn't all rosy. Frost & Sullivan points to the potential for a "Big Brother" atmosphere. Smart card makers will undoubtedly have to prove that personal information stored on the chips won't fall into the wrong hands. But industry experts argue that this and other security-related issues won't be a problem as long as safeguards such as encryption and PIN numbers are used.

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