Plastic intelligence: when will it take off?

When will the smartcard take off? Despite a few high-profile failures, it may already have done so says Christopher Field, but the multi-application holy grail has yet to be found.

Smart technology is the political wing of the traditional magnetic stripe card, employing guerrilla tactics to fight its way into the minds and wallets of the UK public. And like most guerrilla organisations, while it has created the odd explosion and raised a few eyebrows, it has failed to take centre stage.

Smart's greatest failing is also the key to its greatest success - ambition. Supporters have been saying for 15 years that one day we will all have multi-function smartcards in our wallets that will enable us to pay for goods and services, open doors, serve as passports and ID, hold medical details that will help doctors save our lives in the event of accidents, and will automate benefit payments.

And of course, smart can do all this and more, but to date, there are almost no multi-function cards in wide circulation. The early trials were in electronic purses because it was felt that this would be the easiest way into the consumer's wallet, if he could pay for small value items such as parking, newspapers, milk with a card rather than scrabbling around for change.

The best known of these trials was Mondex. Alan Liebert of Smart Card Europe, a not-for-profit association dedicated to the long-term volume roll-out of smartcards, says, "Mondex was potentially a world beating concept that worked well from day one. But it was ineptly presented and marketed, with the result today that it will almost certainly be relegated to small niche markets."

Dorothy Higginson at smart industry club, Smartex, argues, "There was no strong business case for Mondex in Swindon and Visa Cash in Leeds, so the best idea is to add new functions such as smart credit and debit." Nigel Brammar, marketing and communications manager for Oberthur, the largest card manufacturer, adds, "If only Visa and Mondex had added their systems to a switch card, then the normal debit functions would have kicked in above £10 and customers would have had something worth holding on to."

This is where the banks come in: and they are fast catching up, even leaping ahead with the Common Electronic Purse Specifications (Ceps) standard - which is not compatible with Mondex. This standard was created in 1999 to govern e-purse programs. Ceps requires compatibility with the Europay, MasterCard, and Visa (EMV) specifications for smartcards and defines the requirements for an interoperable card application, the card-to-terminal interface, the terminal application for point-of-sale and load transactions, data elements, and recommended message formats for transaction processing.

The significance of Ceps is that the energy for its development comes from the banks, blamed for years for holding smart back until they could see a return, unable to persuade retailers to pay extra to have smart funds cleared. There are four million smart bank cards in circulation but they are used as traditional magnetic stripe cards. Brammar warns, "Retailers need to wake up to smart because after 2005, they will be liable for fraud if the card is not smart."

And yet, Liebert adds, "The banks have been the greatest inhibitor for the roll-out of smartcards, especially in the UK. They have resisted all moves to smartcards since the smartcard environment is one where they cannot control the entire value chain. They have opted to stay with and promote their highly profitable magnetic stripe cards, which they control. This action has held smartcards back by three to five years and the banks are only now becoming interested as new, upstart third parties appear in the marketplace and the banks see themselves losing customers."

This is true - up to a point. The banks are not likely to lose business to other banks, but possibly to non-banks that have successfully rolled out smartcards for niche applications and then see the potential for adding other payment functions themselves or partnering with third parties. Telephone cards and Sky TV access cards are a success but most examples are from outside the UK - transport cards in Hong Kong and Korea and French bank cards which have been smart for years.

However, there are some interesting recent developments. Financial institutions are expected to leverage smartcards to extend traditional payment services in the virtual world - multiple applications such as loyalty programs, digital identification, and electronic money will be securely offered in the near future. And in September 1999 American Express launched the Blue Card. It comes with a chip, free smartcard reader and an Internet security guarantee. Amex is spending $45m on marketing and hopes to acquire more than two million new accounts. The card has a magnetic stripe for credit card payments and smart for payments over the Net, when the PIN number is also required.

Amex is ahead of the game in one important respect: fraud. This is something that worries banks, because of the spiralling costs (a 117% rise in Net, phone and mail order credit card fraud in 1999 according to the clearing association Apacs) and also worries consumers, particularly when they start paying for goods on the Internet. In fact, the Home Office will soon insist that consumers provide additional information when buying over the Net, such as a PIN number, something Amex has already covered.

Meanwhile, experience in other industries has proved that true multi-application cards are still some years off, except in closed (controllable) environments such as universities. The largest smart scheme by card volume in the UK is the Boots The Chemists Advantage loyalty scheme. This was launched in September 1997 using smartcard technology and offering a 4p in the pound benefit to cardholders. There are now 12 million card holders, of whom 8.5 million are regular users. New applications are running at a rate of 40,000 each week.

Boots has just announced that it has teamed up with the Prudential's bank Egg to turn Advantage into a credit card, and also that customers will be able to register with the NHS Organ Donor scheme. A spokesperson says, "We could easily add medical records to the cards for repeat prescriptions and to help doctors diagnose unconscious patients."

Petrol company Shell, the first to go smart in 1994, has five million cards, although the smart element is irrelevant and the many original retail partners are now reduced to Vision Express, Victoria Wine, UCI and Superbowl. However, Shell spokesperson Kate Hill says, "We have recorded a rise in market share year-on-year ever since the card was introduced."

In utilities, pre-pay smartcards appeared until they were outlawed by the Government. In transport, smart for tickets is massive, but again, not in the UK. London Transport is expected to launch a stored-value card for ticketing but several deadlines have already been missed.

Hopes are now pinned on mobile phones. With 22 million in circulation in the UK, supporters reason that the mini GSM card is already a smartcard, although the phone manufacturers are providing choice by adding smartcard slots or making connection for external readers already available in most Tandy stores. And the telecommunications companies are all signing up with banks to provide shopping, banking, access and other services to make their connection deals more compelling.

But the obvious question is, who needs smart in this equation, when wireless application protocol (Wap) probably has all the answers. Even Higginson accepts that Wap, because it is software, can provide any level of security appropriate to each application. Liebert says there is room for smart while Wap is device-dependent. "The mobile becomes another smartcard terminal just as the set top box, the payphone and the PC. The good thing about smartcards is that they can be taken from device to device, reader to reader, one network to another."

However, Liebert adds, "This is the biggest problem with smartcards over the past 25 years, and mobile phone and Internet technologies have left it way behind because smartcards have been technology rather than user or market led."

So, what should IT directors be doing to keep up with smart developments. Liebert says, "Why IT directors particularly? It should be marketing departments, new product assessors and Web site designers. Once an idea is born and a business case made, then the IT department should get involved."

While this is clearly the ideal scenario, IT directors will need to keep up with the trends and convergence is bound to make this difficult as they try to decide which way to go. For the time being it is likely that the switched-on consumer will be presented with device-dependent solutions such as mobile-based SIM card rather than a dedicated smartcard. But once smart credit cards reach critical mass and the banks strike some compelling partnerships with third-party service providers a new war to win loyalty between credit card companies will begin.

The key to the future of smart lies in the willingness of developers to create applications, for solutions providers to create multi-function cards that consumers will want to use, and for retailers to convert their card readers to smart. And to achieve this, some understanding of platforms is critical. As yet program loadable cards such as JavaCard, Multos card and Windows card have not made an impact.

Processor power and memory availability are not yet available in sufficient quantities to make these cards practical. They are also too expensive. The market leader by capability is Multos but it does not have the market presence of the other two. In addition Java is a seamless development migration process, as indeed is the Windows option. But Windows is the least developed - Liebert's bet is on the JavaCard.

What factors make electronic purse schemes successful?

  • Consumer acceptance is not merely a question of ensuring that there is a large number of cards and card-accepting terminals in a particular town or region. Each consumer has a different pattern of behaviour, and critical mass has to be achieved for each consumer
  • Alliances, rather than tensions, are needed between the interests of the various participants
  • The key sponsors of schemes are generally very large retailers, financial institutions, and/or very large services organisations. It is also feasible, but difficult, for a technology-provider to act as the main driver
  • Schemes are too complex to implement all at once. It is essential that the first phase contain enough promise to interest all relevant parties, but be sufficiently open-ended that additional functions and additional parties can be added later, with relative ease.

How to win support for smartcards

IT directors who feel that smart will become an important part of their technology strategy could roll out a scheme within the organisation, as the Halifax did to some extent when it encouraged its employees to sign up to Mondex in Swindon. Cafe and restaurant facilities within the Halifax campus were equipped with card readers to accept payment and the local cash machine could be used to download more credit.

If only things hadn't stopped there. Had the Halifax been able to do joint marketing deals with a local Sainsbury's, cinemas, sports clubs and buses, the bank might have had a product which it could have called its own and cut loose from Mondex.

The smart IT director must keep a close eye on the Boots Advantage scheme, which is fast becoming the first major multi-application smartcard in general use in the UK.

Smart is in the detail

Smartcards continue to be popular for niche or one-off applications. Retailers, Marks & Spencer, Debenhams and Next are all investigating a card to deliver made-to-measure tailoring to customers. The cards will act as passports for customers' measurements which will made available to retailers over the Internet. The measurements are taken in store using a 3D body scanner, currently on trial at made-to-measure retailer Hout-Brox in the Netherlands.

European smartcard growth

The growing interest in mobile commerce and network security is fuelling the smartcard market in Europe where shipments are expected to reach one billion by 2004, according to IDC. European Smart Cards Market 1998-2005 states that about 284 million smart cards were shipped in Europe in 1999, up 44% over the previous year. Moreover, as the rest of the world continues to accept smartcards, Europe's market share dominance will dwindle.

The race to achieve millennium compliance swallowed up much of the IT director's time last year. And, as soon as that problem had been dispatched, e-business began to make its unreasonable demands on the department. Other issues have been sidelined out of necessity. But they haven't gone away. This week we focus on two bubbling issues, smartcards and the euro (see page 36), which have been left on the back-burner, but can no longer be ignored.

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