Smart Connections

Although all of the major bank card associations agree that building a critical mass of acceptance for smart cards in the United States is a complex problem, each of them-Visa, MasterCard and American Express-appears to be pursuing a unique strategy for achieving it.

Each issuer is facing a classic chicken-and-egg dilemma: Without consumer demand for smart cards, how will the infrastructure be put in place? Without infrastructure, how can the cards be used? Without applications, why will consumers use these cards?

But through a web of partnerships and marketing programs aimed at consumers, banks, merchants, card manufacturers, software vendors and infrastructure providers, issuers are building momentum for smart card adoption in the United States. Indeed, according to Frost and Sullivan, North American shipments of smart cards will grow from 32 million in 2000 to 125 million in 2004.

These figures, however, are just a drop in the bucket compared to offshore smart card use rates. According to Frost and Sullivan, approximately 1.8 billion smart cards were shipped in 2000, a figure that will grow to 3.66 billion in 2004.

The market for smart cards in Europe is already well established and accounts for the majority of shipments of cards to date (including microprocessor and memory cards). The reason: infrastructure and telecommunications issues have accelerated adoption of smart cards. With this impetus, Frost and Sullivan projects that chip card shipments in Europe will increase from approximately 800 million in 1999 to just over 2 billion in 2006, with revenues growing from $1.2 billion to $4.2 billion during the same period.

And the rest of the world may soon catch up to Europe's smart card use. Over the next several years, growth in the smart card market will be led by Asia, South America and the United States, according to a recent GartnerGroup study.

But this smart card growth picture is far from perfect, at least for banks. The reason: financial services accounts for only a small share of the various application segments within the total chip card market. Memory cards and telephone cards are currently the largest segments based on shipments, and network security and national identity cards are expected to be significant growth areas in the near future.

Although the financial services segment for smart cards in the U.S. is currently quite small, it is expected to pick up steam thanks to recent vendor initiatives and improved technology that solve some adoption and use concerns.

THE STANDARDS GAME

For example, operating system standards for smart cards appear finally to be stabilizing. Earlier this year, there were still three major players vying for dominance in the financial smart card arena: Sun Microsystems with its JavaCard standard, Microsoft with Windows for Smart Cards and Mondex/MasterCard with MULTOS.

In May, Microsoft cancelled its presentation at the CardTech/SecureTech conference and announced it was making the original source code of Windows for Smart Cards available to licensees. Since then, the perception in the industry is that the market has winnowed to two players, Sun and Mondex/MasterCard.

"It was quite a shock to us to find that the Microsoft presentation was cancelled," said Prianka Chopra, research analyst at Frost and Sullivan. "No one has given up on Microsoft in the smart card area but we will have to wait and see what they are up to."

By licensing the source code, Chopra said, Microsoft is diluting its strength as an open platform. The move, in effect, turns the operating system into a proprietary platform.

If Microsoft does indeed distance itself from the smart card market, JavaCard may emerge as a standard, said Chopra.

Visa has supported Java from the beginning and its message regarding smart card technology has been focused on openness and standards. "We are not in the operating system business," said Diana Knox, senior vice president, smart card applications and business development at Visa U.S.A., San Francisco. To encourage innovation and competition, Visa partners wherever possible and promotes open standards to entice multiple suppliers to develop new solutions, she added.

After developing several smart card applications internally-including OpenPlatform, a layer of security software, and a payment application-Visa turned the software over to an industry association, now known as the Global Platform consortium.

MasterCard, which announced in June that it would increase its stake in the smart card technology vendor Mondex International from 58% to full ownership, is in the operating system business but also plans to partner along the way. "The Mondex acquisition was a logical extension of our position over the last few years," said Chris Rieck, vice president, e-business services at MasterCard International. "We have always had a leading position with Mondex and we felt that it was more sensible to bring those resources in-house."

MasterCard remains "100% committed" to MULTOS as its preferred smart card operating system because it represents an open, cost-effective, highly secure solution for multiapplication cards, said Art Kranzley, senior VP, global e-business at MasterCard.

Still, the company announced in May that, in addition to MULTOS, it would support JavaCard and all major proprietary smart card platforms.

American Express, which was the first major issuer to promote smart cards in the United States, also supports Sun's JavaCard operating system for its Blue smart cards. Amex has already rolled out marketing and partnering programs that promise to draw consumers and merchants to use smart cards.

Development efforts for new Blue applications have been focused in-house to date, noted Tony Mitchell, vice president of public affairs at New York-based American Express. Blue, he said, is "an evolving card with new functions being added over time."

At year-end 2000, American Express estimated there were 4 million Blue cardholders worldwide with the United States accounting for just over half.

APPLIED APPROACH

Whether it's American Express Blue or a Java-based product from Visa, one of the key advantages of the chip card as opposed to the stripe card is the amount of information that can be stored. Passwords, payment instructions, spending parameters and even coupons can all be loaded onto a chip card.

All of the major issuers stress that developing multiple financial application for smart cards will likely drive U.S. consumer acceptance of the technology. "The European market for smart cards is more focused on payment," said Visa's Knox, "but in the U.S., it is necessary to pursue a multi-application strategy."

Cardholders, she explained, complain that they carry too many credit cards and with the smart card it is possible to consolidate several of these applications onto a single card.

The primary applications deployed on smart cards today are e-cash, payment (i.e., credit/debit), secure access (i.e., PIN/digital identity) and loyalty. Which applications will accelerate consumer adoption of smart cards has yet to be determined. "I don't know that there is a single kind of application that will appeal most to consumers-there may be a lot of different applications that have appeal," said American Express's Mitchell.

MasterCard's Rieck believes that "loyalty and information applications are key to the customer value proposition for smart cards." And Visa's Knox views "applications related to loyalty and the ability to move easily from purchasing in an online world to a physical world" as paramount.

The smart card environment, experts say, is similar to that of personal computers 10 or 15 years ago. "In the past there were limited applications for personal computers but as we started to see a growing array of applications, we also saw an increase in the utility for consumers to purchase and use computers," said Knox.

Issuers expect applications for smart cards to continue expanding with everything from hotel room keys to frequent flyer miles to subway tokens being embedded on a single chip. The ability to partner with a range of vendors and suppliers is turning out to be crucial to developing a market infrastructure for smart cards.

Issuers have been partnering with retailers, e.g., American Express with Virgin MegaStores, and Visa with Target, which plans to deploy smart card readers in all of its retail outlets.

Visa is also involved in the deployment of smart cards at the General Services Administration. Multi-application smart cards are being issued to GSA employees with features such as payment, network access and identification embedded on the card.

The GSA smart card will also include an e-ticketing application that allows employees to use their card as a boarding pass on American Airlines flights.