This week in Washington, thousands of people are flocking to the Cardtech/Securtech annual conference and exhibition, which may be the premier international event for charting the progress of smart card technology.
Paradoxically, the meeting takes place in a country where smart cards are still a curiosity and a puzzlement, particularly to bankers.
To assess this international phenomenon and the recurring questions about American acceptance or lack thereof, American Banker approached several people on the supply side who see the global picture. They represent smart card suppliers Bull, Gemplus, Schlumberger, and Motorola, and International Business Machines Corp.
They share a generally conservative near-term view of the U.S. market but are optimistic about growth opportunities, even in banking and payments.
How would you describe the current state of the smart card industry, globally and in North America?
Terrence Crowley, regional manager, smart cards North America, Schlumberger, Moorestown, N.J.
Globally, smart cards are moving from being just a European-centric phenomenon. Asia and Latin America are hot markets and telephony applications like cell phones and pay phones are extremely successful.
Banking has more infrastructure considerations but the business case keeps moving in the right direction. There are a number of stored-value programs in places like Hong Kong and Brazil.
In the U.S., we don't see telecommunications as an application that is going to go anywhere unless there is an area where a lot of coins are used or there is no access to prepaid phone cards.
Stored value alone has been piloted in '96 and '97 and the results are being evaluated to determine the next step, e.g., multiple applications on a Visa, MasterCard, or American Express card. Also, government agencies are propelling bank issuers with smart card requirements, as in the U.S. General Services Administration's commercial card contracts and electronic benefits transfer programs.
Simon Nutt, worldwide sales manager, IBM smart card solutions, London :
The banking and financial segment is poised for growth. In North America, projects like the GSA are beginning to define the nature of the opportunities.
Europe has been at the forefront of smart card technology, and there are good infrastructure reasons why. Countries like France and the Netherlands have been very quick to adopt smart cards.
Banks have been using smart cards as stored value devices for some time. There are a lot of hybrid cards with chips and magnetic stripes, often for reasons of incompatibility with existing infrastructure. There are also trials in the U.K. aimed at using smart card technology to reduce fraud.
Bruce L. Caswell, IBM smart card solutions manager for North America, Bethesda, Md.:
The North America marketplace is in a period of transition and, optimistically, a period of awakening. There is a general shift in the underlying technology and a convergence toward standards-based solutions. The announcement by Visa about the open platform and its commitment to Java as the basis for all future chip cards sent a major message to the industry. The vendors have responded and there are four or five different companies developing Java cards.
IBM has also been selected as one of the "Visa Smart" partners, which will help the banks around the world to figure out the business case and plan their strategies for deploying new chip-based products.
Donna Jeker, vice president, strategic marketing and alliances, Gemplus Americas, Redwood City, Calif.:
The smart card industry is in a highly dynamic state, with new projects and technologies driving the market toward a critical mass. Clearly, multiple-application cards and the broad availability of Java developers on a large scale will dramatically impact the market.
John Savage, sales and market development manager for Motorola smart information transfer division in the Americas region, Hauppauge, N.Y. :
To date, the U.S. marketplace is a much smaller piece of the overall pie than, say, Europe. Smart cards are being deployed in the set-top box market, the digital satellite business, as well as in North American GSM (global standard for mobile telecommunications) operations.
Donald Zereski, president and chief executive officer, Bull Americas, Billerica, Mass.:
Globally, smart card technology is progressing very well. Significant volumes with national programs in health care and financial services are being achieved. The U.S. continues to be a challenge. The U.S. does not share the same market dynamics of fraud, infrastructure, and telecommunications with Europe and the rest of the world.
Establishing a business case in the U.S. has been and will continue to be more difficult. The near-term opportunities will be in closed systems such as campus programs and electronic commerce.
Q: What are your growth projections both globally and regionally? What are the key factors for expected growth?
Zereski: Globally, Bull is projecting a 50% growth rate in the card and terminal business and seeing those results achieved. In North America, we are much more cautious. The smart card industry has a long history of not meeting its expectations in the U.S., and Bull expects that to continue for the next two years.
Potential technology and standards obstacles have largely been overcome. Key growth factors focus on implementation. What is needed in the U.S. are commitments from potential issuers. Progress is being made, which is the good news.
Jeker: Europe is the largest and most mature market. Asia is an area of adoption on a large scale and many large banks are deploying there.
The U.S. has a very complex and technology-rich installed base, which is both its strength and its weakness. The U.S. has heavily invested in magnetic-stripe, on-line infrastructure and smart cards represent a new paradigm that needs incremental revenue and market share to justify. Yet the U.S. is also determining how Java will be used in the development of electronically delivered services. The implication here is that U.S. banking and payment institutions will be focusing on giving smart cards a higher profile in electronic commerce.
Savage: Technology standards, from a generic standpoint, is certainly an area where there is still work to be done. Different industries are playing a strong role in trying to resolve those issues, so that standards become one and interoperability between industries is also facilitated.
Crowley: Globally, the industry is moving forward at a 50% compound annually growth in revenue for the next two to three years. North America is projected to grow at a slower pace. It is still less than 5% of the world market because the business case is different. A breakthrough might come when the smart card is thought of as a $3 computer, rather than an expensive credit card. Marketers must bear responsibility. No longer is technology the only issue.
Caswell: We are not projecting tremendous growth over the next two to three years in North America, but certainly four to five years out, it will start looking rosier.
Q: How big is the banking/payments segment of the smart card industry? How do you anticipate its growing and changing, globally and in North America?
Crowley: In the U.S., less than 1% of transaction value flows through smart cards. The question becomes, where do smart cards present a solution to a problem or create a value-added service?
Security enhancements for smart cards eliminate the need to carry bills around, and the risk of on-line compromise is diminished in an electronic commerce environment. There is an ease of settlement, in comparison to the large portion of transactions that are still paper-based. There is a great opportunity for smart cards to be used in connection with electronic benefits transfer and coupons or gift certificates.
Zereski: The financial services segment is the largest opportunity for this technology and Bull has excellent results internationally. Bull has shipped over 30 million cash cards to the Banksys Proton licensees. Bull is also responsible, since 1986, for the operating system development and maintenance of the French bank cards, with more than 25 million cardholders. Bull has delivered on a contract to extend the French bank card into cyberspace for e-commerce. This program is currently in 10,000 households.
In North America, the financial segment has experienced some difficulty. The fact that stored value has not had success in the U.S. is not a smart card technological issue. Stored value is only one of many applications of this technology. Secure access with authentication, encryption of data communications, digital signatures for nonrepudiation of transactions, secure key management, and other functions are required for financial services and will be implemented with time.
Jeker: In the U.S., payment will most likely be looked at less like a discrete market and more as one of many applications on multi-application cards - along with transportation, telecommunications, access control, and others.
Savage: On-line checks and confirmations are very easily done in the U.S. A business case needs to be built beyond that to make these organizations invest in rebuilding the infrastructure to allow for smart card utilization.
In France, smart cards were initially developed and deployed in the banking system to significantly reduce fraud, which because of the infrastructure is not as serious in the U.S. What many people here are driving toward is multi-application platforms with value-added services that can attract and retain clients.
Nutt: Globally, there is an opportunity in the next five years for about $15 billion of smart card spending. Banking and financial services represent about half of that opportunity.
The general consensus is, it is very difficult to make a business case for the deployment of cards in a single-application environment like electronic purse. In Asia-Pacific, for example, one bank has a card with a loyalty application incorporated into the smart debit and credit functions.
Caswell: The U.S. open smart card system will probably not take off until 2001, when you start getting up over two million cards in circulation, and then four million by 2003. But sizing the banking segment is difficult and I don't think the market will develop for electronic purse applications as we had once hoped.
Major banks are looking at smart cards to expand their merchant base. They want to offer their merchants a multi-function terminal that not only offers debit and credit based on the magnetic stripe, but also can automate a shopper-loyalty program. High-end merchants like Kmart have automated this stuff already, but there is a huge middle tier of merchants seeking ways to do this and the banks are trying to come up with solutions.
How do financial industry applications relate to other market segments?
Crowley: Banks have the advantage of having established trust and familiarity among consumers to defend incursions from converging industry competitors. Bank customers will be favorably disposed toward smart cards used for loyalty programs with retailers. However, 90% of smart cards are issued by telecommunication companies.
Zereski: Nonbanking applications for smart card technology that have been implemented on a large scale globally also have strong potential in the U.S. These include loyalty, public assistance/electronic benefits transfer, and transportation.