Microsoft Corp. chairman Bill Gates said Monday he sees smart cards as a key element in removing obstacles to electronic commerce.

"The security issue-knowing who is communicating with you," will be crucial to realizing the commercial promise of the Internet, Mr. Gates said in his keynote speech to the Payments '98 conference, sponsored by the National Automated Clearing House Association and the National Council on Uniform Interest Compensation.

He predicted that smart cards with digital identification certificates will eventually replace, and become as ubiquitous as, password security with automated teller machine cards.

Microsoft has been on the smart card bandwagon for some time. It has participated in the Smart Card Forum and PC/SC Work Group, a high- technology consortium that promotes integration of chip card readers with personal computers and their keyboards.

Signaling his interest in the technology, Mr. Gates gave smart cards and related electronic commerce issues almost as much attention as electronic bill payment and presentment and MSFDC, Microsoft's joint venture in that field with First Data Corp. A centerpiece of the presentation was an on- stage transaction demonstration performed by Matt Cone, an MSFDC official posing as a Bank One customer.

On broader electronic commerce matters, Mr. Gates expressed optimism that gaps in the Internet infrastructure will be filled. He conceded that regulatory constraints might slow high-bandwidth cable television connections to homes, but only by a few years. And he said improvements in processing speeds will overcome limitations in the data encryption necessary to secure transactions.

Addressing an international audience of about 4,000 bankers and other payment services professionals, Mr. Gates made a subtle pitch for accelerating smart card deployment, not necessarily waiting for more powerful processors to become available for the cards' chips. While many smart card developers say it will take 16- or 32-bit processors for the cards to fulfill their potential and combine multiple services on a single piece of plastic, Mr. Gates said the currently plentiful and cheaper 8-bit versions have plenty to offer.

"We need an infrastructure and common agreement on how authentication is to be done," he said. Noting how smart cards have been issued in several countries for secure access to personal computers and public kiosks, he said, user identification is "the key reason for the smart card and it can be very inexpensive. We can go with simple, public key (encryption), 8-bit smart cards where the price will be under $1 in the very near future."

Mr. Gates elaborated on smart cards in an exclusive interview with American Banker, conducted via e-mail last week. He said the Windows operating system supports all major chip card readers and standards, and Microsoft Internet Explorer accommodates the related concept of a digital wallet.

"The important thing for now is that we keep smart card costs extremely low and don't make them try to do too much," he said. Over time, "smart cards and wallet PCs will make banking easier" and "in the U.S., smart cards will have their first impact in simplifying security."

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