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Smart Card Graduating from Exception to Acceptance

In the rapidly growing smart card market, there's no such thing as too many cooks in the kitchen. Smart card technology has come a long way over the past 30 years, and now hundreds of organizations across multiple market segments are taking part in its development and deployment. The Smart Card Alliance brings all of these companies together with the goal to help drive the continual adoption of smart cards in the United States.

Smart cards are plastic cards about the size of a credit card and contain an embedded computer chip that can store a user's personal information, such as account data, passwords, shopping preferences and biometric information.

Smart cards have been widely adopted in Europe, Latin America and Asia by telecom companies for wireless phones and by financial institutions and retailers for security purposes with bankcards and processing payment transactions. Most bankcards in Europe and around the world already contain smart cards, which have been driven largely by Euro/MasterCard/Visa (EMV) mandates. The U.S. has been somewhat slower to use the technology with bankcards and payment devices, but most in this industry know it's just a matter of time.

"Over the last three years there have been in excess of 130 million smart cards issued in the U.S. and Canada alone," said Paul Beverly, Chairman of the Board for the Smart Card Alliance and Vice President of Smart Cards at SchlumbergerSema in North America. "You can basically say that one out of every three Americans somehow has a smart card." (This is largely because of the launch of smart card programs by card issuers such as American Express and Visa.)

The Smart Card Alliance is a not-for-profit organization whose membership spans multiple industries: banking, financial services, computers and technology, telecommunications, health care, retail, transportation, government and even entertainment.

Companies involved in the development of smart cards include chip manufacturers, card manufacturers, application developers, equipment manufacturers, middleware companies, systems integrators, project implementers, card issuers, card associations and banks, just to name a few.

"It's not a narrowly defined, single type of technology or industry, but smart cards carry a very broad spectrum," said Randy Vanderhoof, Executive Director of the Smart Card Alliance. "You need all these components in the development of end-to-end solutions, and there isn't a sole source that you can go to that supplies all of them; however, it's a very integrated industry where there are many different players developing the pieces to the overall solution. There's a tremendous amount of R&D and technical innovation that goes into this industry."

The Smart Card Alliance is the result of a merger in early 2001 between two smart card groups with similar goals, the Smart Card Industry Association and the Smart Card Forum. Any individual or company that is focused on the use of smart card technology can become a member of the Smart Card Alliance.

The organization's mission is to "stimulate the understanding, adoption, use and widespread acceptance of single- and multi-application smart card technology through specific projects such as educational programs, market research, advocacy, industry relations and by bringing together, in an open forum, leading users and technologists from both the public and private sectors."

More than 100 companies are members of the Smart Card Alliance; it recently added about 25 more organizations to its membership list, including BearingPoint, ViVOTech and RSA Security. Through active participation in the organization, members can benefit by gaining more visibility as promoters of smart cards from educational meetings and work groups, numerous networking opportunities, information sharing and collaboration on research, implementation and innovation. Both members and non-members can attend the annual meeting, access white papers and participate in teleseminars, conferences and educational programs.

The Smart Card Alliance is truly a source for smart card education and support, and the numbers show it reaches members and non-members alike. The Alliance's Web site averages more than 500,000 hits per month. In February 2003 alone, it received more than 3,000 requests to download its white papers, and those requests came from all over the world.

"I believe our white papers have been the most well-received initiative of the Alliance so far because the materials that we generate in our task forces are done by collaborating with the work of some 20 organizations sharing their input, reviewing the information and coming to a consensus on the message," Vanderhoof said. "What is being delivered to the industry is a well-researched, extremely informative and non-vendor-biased view of what's happening in the marketplace."

The Alliance recently released two white papers relevant to the payment industry, including, "Smart Cards and the Retail Payments Infrastructure: Status, Drivers and Directions" and "Contactless Payment and the Retail Point-of-Sale: Applications, Technologies and Transaction Models."

Smart Card Origins

Smart card technology was first used in payphones in France in the 1970s. Faced with high maintenance costs for its coin-operated phones, a telecommunications company developed a card technology to replace the use of coins in phones with the purpose of decreasing maintenance costs, decreasing vandalism and increasing payphone usage by providing users with more convenience. The cost of making a phone call had increased, so the amount of change required to make a call had increased, too.

This was the first instance of a read/write card that people could carry with them and use to make purchases. The use of smart cards in Europe grew from payphones to parking systems to general retail and financial institutions.

"Financial institutions saw [smart cards] as a way to improve the capabilities and security of their credit and debit card products," Vanderhoof said. "And the technology has continued to evolve in a number of vertical markets beyond that."

The U.S. has gradually adopted smart card technology for government identification and access purposes, state EBT programs, transit programs in metropolitan areas and loyalty card programs. "The U.S. doesn't have the same fraud problems as Europe as a percentage of total transactions, so there's a different set of motivators and drivers that are moving smart card technology in U.S. financial markets," Vanderhoof said.

The Alliance understands moving the U.S. payment infrastructure to smart cards is neither a simple nor inexpensive process because it requires investments in new technologies (especially by merchants) and new processes.

However, the Alliance expects smart card espousal and acceptance to continue to grow in the U.S, with implementation driven by business cases for new multi-application smart cards with services that provide merchant- and consumer-specific benefits.

Loyalty Programs and Contactless Payments

The main drivers of smart card technology in the U.S. right now are customer retention or loyalty programs, which help reduce the amount of credit card turnover, and contactless payments, which increase consumer spending and convenience.

"All credit cards and debit cards are pretty much alike in terms of what they do and what they offer, so there's very little stickiness that issuing banks can create with their card product," Vanderhoof said.

"They see smart card technology as a way to differentiate themselves from the other products on the market by offering some of the advanced capabilities that the card delivers such as higher security, the ability to do online transactions more securely and the potential to have things like loyalty programs, frequent shopper points and electronic coupons that can be delivered directly to the cardholder and redeemed on the spot."

Retailers and card issuers choose to implement smart card technology to securely identify their loyal customers and reward them at the point-of-sale. Smart cards can be used to pay for purchases made at both physical and Internet retailers. Some loyalty programs in place include American Express' Blue card program, Visa's Smart Rewards program and the Target/Visa project, which is the largest deployment of smart cards in the U.S.

The Smart Card Alliance also has been paying close attention to several contactless payment pilots that leverage smart card technology. One of these is MasterCard's PayPass program, which is being tested in Orlando, Fla., at numerous locations, such as McDonald's, Chevron, Eckerd Drug Stores and Friendly's Restaurants ("Tap it or Wave it, Payments Add Up" The Green Sheet, January 13, 2003, issue 03:01:01).

The PayPass card contains a magnetic stripe, an embedded chip and an antenna. When card users tap or wave their card on any compatible payment terminal, account information is transmitted wirelessly, communicated directly to the terminal and then processed through MasterCard's network.

The solution is even faster than accepting cash, so consumers speed through the checkout process. The tests and focus groups have shown that average transaction amounts increase compared to cash transactions, and PayPass may help attract new customers and increase their loyalty to a store and the card companies. The Alliance believes the more versatile the card, the more likely users will accept it. "I expect these pilots over the next 12 months to turn into full-scale roll-outs," Beverly said.

Vanderhoof said the Smart Card Alliance is especially interested in contactless payment programs at quick-service restaurants, which have been primarily cash-based businesses.

"One of the obstacles that has limited credit card transactions in fast food has been the slowing down of the transaction process," Vanderhoo_f said. "Contactless technology not only does not slow it down, but it can actually speed up the transaction process. It's even faster than accepting cash and making change."

He predicts the consumer will have a positive experience with contactless cards in a fast food environment because there is no wrong way to present the card. It's a simple "tap it" or "wave it" method that consumers can embrace easily. "You don't have the learning process you'd have to go through if you were moving away from swipe to something else," Vanderhoof said.

Biometrics vs. Smart Cards

Another emerging technology in the payment industry is biometrics. Many are asking, "Which technology will prevail, biometrics or smart cards?"

"Biometrics is a form of real-time identification, so the scope and the scalability of a biometrics-activated authentication solution is limited by how and where you store the reference biometric against what you are reading in terms of the real-time transaction," Vanderhoof said.

He described the example of consumers who provide a biometric data sample to use at the point-of-sale at a particular grocery store for validating their transactions; in return, they receive preferred shopper benefits. However, if these shoppers go to a different store, it is unlikely that their biometric information would be stored at that other store.

This is where smart cards come in. Consumers' biometric information, such as a fingerprint, voice sample or retina scan, can be stored on a smart card and get carried with the consumer, who can use it for payment at other retailers.

To answer the "Biometrics or Smart Cards?" question, Vanderhoof believes that it probably won't be one technology or the other that will be adopted - he expects it to be both. He considers them to be complementary, not competing, technologies.

Smart Partnerships

The Smart Card Alliance has formed many partnerships with other companies promoting smart card technology, such as Global Platform (a smart card standards organization), the International Card Manufacturers Assocation (ICMA) and the International Smart Card Associations Network (ISCAN). In a sense, the Alliance's members can be considered partners, too.

"The Smart Card Alliance is not a standards organization, but many of our members and partners contribute their expertise to the development of those standards because that's what's going to drive the adoption around the world," Vanderhoof said.

In 2002, Vanderhoof helped found ISCAN, which unites a number of organizations in other countries that are similar to the Smart Card Alliance.

"We collectively agreed that we share a common mission in the adoption of smart card technology, so we work together to share our resources such as white papers, conference programs, teleconferences, new releases, etc.," Vanderhoof said. "It will help all of us be more aware that we operate in a global economy rather than in our own geographic region."

The Alliance also serves as an outreach into various vertical markets, such as the retail and payment industries, by forming alliances with organizations such as the Electronic Transactions Association (ETA), the Retail Trade Association, the National Association of Convenience Stores and the National Retail Federation.

"As smart cards become increasingly used and part of the evolution of payments, then we want to make sure we are providing the necessary information and connections between our organization and others," Vanderhoof said.

Smart Cards Have Arrived

With a broad membership that spans multiple industries and a number of solid partnerships around the world, the Smart Card Alliance is focused on four simple priorities:

  1. Influencing smart card standards.
  2. Maintaining a voice in their adoption and implementation.
  3. Serving as an educational resource to the industry.
  4. Providing a forum for discussions surrounding smart card technology.

One myth the Smart Card Alliance is trying to overcome is that the smart card market is not growing in the U.S. "The market in the U.S. is absolutely growing, there is no question about that," SchlumbergerSema's Beverly said. "In the U.S. over the last couple of years, the market has experienced a 20-30% growth rate. But it's probably going to still be another three to five years until all of the bankcards have chips in them."

First National Bank of Omaha, First USA, FleetBoston, Providian and Target Financial Services are some of the financial institutions issuing credit cards with smart cards. But there still are many more to go. Imagine the possibilities for the payment industry.

"You know the old question, 'When is the smart card market going to come to the U.S.?' Well, that's really old news," Beverly said. "Today, the U.S. market is already in excess of $100 million. It's a real business now."

For more information about the Smart Card Alliance, visit www.smartcardalliance.org


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