Schlumberger, the French electronics and industrial company, believes it has a clear view into the card-technology crystal ball.
This explains why, in late December, the company that ranks second in production of cards with computer chips inside acquired Malco Inc., the largest producer of plastic payment cards in the United States.
You don't have to be a semiconductor engineer to see the potential synergy. Schlumberger contributes expertise from the world-leading French smart card market, while Malco brings a plastic-production capability equaled by few if any card manufacturers in the world.
"The strategic significance is clear," Clermont Matton, a top Schlumberger executive in France, said when the transaction was announced. "The acquisition of Malco uniquely places Schlumberger with a U.S. manufacturing facility that will satisfy customer requirements for quality, security, and chip-card technology."
Underlying Mr. Matton's statement, and those of other Schlumberger and Malco officials, is the expectation that the United States is on the verge of becoming the biggest market in the world for cards with silicon memory or higher-intelligence chips. This stands to reason, since the United States leads the world in its general appetite for plastic payment cards, with more than a billion in circulation.
But there is also an air of realism in Chesapeake, Va., where Schlumberger's Smart Cards and Systems division has its North American headquarters.
Michael H. Smith, the unit's general manager, acknowledges that the U.S. smart card market is in an early stage of development and will take years to mature.
Still, there seems little downside risk in Schlumberger's acquisition of Malco from Thorn EMI of Britain. Even if smart cards are a bust, Schlumberger would be left with what is considered in card-making circles a blue-chip performer.
Just by virtue of getting together, in a private deal that is believed to be valued at several million dollars above Malco's $27.5 million of annual revenue, the two companies have turned the U.S. smart card momentum up a notch.
If the business has not attained critical mass, it could be close to being able to create a self-fulfilling prophecy.
The three biggest names in French card-technology exporting - Gemplus, Schlumberger, and Bull (see page 17) - are firmly entrenched on U.S. soil, ready to capitalize on the anticipated acceptance of technical standards endorsed and promoted by MasterCard International, Visa International, and domestic initiatives like the prepaid card program of Electronic Payment Services Inc. in Delaware.
The technology and the patents may be predominantly French, but the smart card companies' assault on the U.S. has a very American cast.
The seniormost player is Dan Cunningham, Gemplus' U.S. chief executive in Gaithersburg, Md., who traces his smart card career back more than 10 years to a post with Bull's MicroCard Technologies unit. Gemplus, which has its main factory in Gemenos, France, is expected to announce plans soon for a U.S. manufacturing facility.
Arnaud d'Avezac, a Frenchman, is now president of MicroCard, but Gerald Hubbard has the higher U.S. profile as vice president of marketing and treasurer of the Smart Card Forum, a fast-growing and influential, cross- industry promotional group that includes all the major card-makers.
Michael Smith has been one of Schlumberger's top smart card executives for four years, and was the first U.S. native on that career path. After eight years in the company's CAD/CAM division, which does computer-assisted design and manufacturing, he was given worldwide responsibility for smart card business development in early 1991.
He was later assigned to home in on North America, as Schlumberger identified it as a key growth opportunity. Mr. Smith, 43, reports to Jim Davis, Schlumberger's vice president and general manager of transaction systems for North America, who in turn reports to Paris.
"The U.S. market is seen as important for all of Schlumberger's business lines," Mr. Smith said in a recent interview. "Electronic transactions is one of the 11 major product lines of Schlumberger," a $7 billion conglomerate more widely known for oil-field equipment and industrial controls.
"People don't realize how big in electronic transactions we are - about $500 million in sales."
Malco, which will continue to be headed by president Louis Bisasky, joins Smart Cards and Systems in the North American transaction systems unit. Schlumberger expects several of its European accomplishments, such as its leadership in smart-card-accepting telephones (160,000) and point of sale terminals (140,000), to serve its transactions business well as the U.S. market develops.
Mr. Smith was responsible for negotiating a 1993 joint marketing agreement with Diebold Inc., the U.S. automated teller machine leader, which promises to expand the market for Schlumberger's terminals. Schlumberger also claims to be on the leading edge of card-based systems for parking and mass transit, which are just beginning to be examined in the United States.
"In 1995, we will begin to see important trials of smart cards for stored-value applications," Mr. Smith predicted. He was referring mainly to the concept of the electronic purse, which takes the place of coin and currency in small-value transactions.
He said the activity in this realm will go far beyond the Electronic Payment Services Smart Card Enterprise test in Delaware, which has been the most publicized. In this regard, the card manufacturers may have the gift of foresight: They are privy to pending projects that they are not allowed to speak publicly about.
EPS has signed Gemplus to produce its chip cards, but Schlumberger has a piece of the action as terminal supplier through the Diebold alliance, and eventually Gemplus will lose its card-making exclusivity, Mr. Smith said.
By next year, he expects decisions to be made about the viability of stored-value programs and progress toward interoperability agreements, which will avoid a proliferation of technically incompatible systems.
An explosion of systems and applications would occur in 1997 and 1998.
"It will take about four years to move from pilots to widespread use," Mr. Smith said. "It will start on a regional level and grow from there, much like debit cards.
"Credit cards will be on a separate track" from stored value, and will move more slowly in the United States than in Europe or Asia, or even Canada, he said.
Banks in France, the original hotbed of chip cards, have issued more than 20 million transaction cards with chips in them. They are credited with the virtual eradication of domestic credit card fraud - a task aided by chip cards because France did not have a well-developed, on-line authorization system like that available to U.S. card issuers.
Chip cards are also weaning the French pay-telephone system from coins and the attendant vandalism. Prepaid telephone cards are growing in the United States, but most are built around centralized data bases rather than value stored on the cards.
Canada may be more receptive to the chip, Mr. Smith said, because its industry structure and mentality are more European.
"The Canadians are very security-conscious, as can be seen in the Interac point of sale specification, and the benefits of smart cards may be more valued by Canadian bankers than U.S. bankers," Mr. Smith said. "The U.S. banks have delegated more to third-party processors and to the card associations than did the Canadian banks. That's why MasterCard and Visa take the leadership role here" in technical and smart card planning.
