The first true smart card appeared nearly 20 years ago in France to combat fraud in the banking sector. Today, the use of smart cards is expanding dramatically into other sectors.
What prompted the French banking community to approach hardware supplier Bull and chip maker Motorola to design the smart card was the vulnerability of cards with a magnetic stripe to fraud. Today smart cards are being used for a variety of applications and, with the advance of the Internet, are liable to become even more widely used.
Futurologists have long predicted the advent of the cashless society.
As long ago as 1965 Thomas Watson, president of IBM, was predicting the arrival of the cashless society. 'In our lifetime we may see electronic transactions virtually eliminate the need for cash,' he wrote. 'Giant computers in banks, with massive memories, will contain individual customer accounts. To draw or add to his balance, the customer in the store, office or filling station will do two things: insert an identification into the terminal located there; punch out the figures on the terminal keyboard.
Instantaneously, the amount he punches out will move out of his account and into another.'
The new generation of smart cards brings Watson's vision of the cashless society even closer.
It is important to define what is meant by the term smart card, which is often used misleadingly by organisations. The UK government, for example, used the term in 1995 when it announced smart cards were to be used to replace benefit books to counter fraud. In fact the government plans to use cards with a magnetic stripe but without the microcontroller chip which designates the true smart card.
Industry analyst Dataquest defines two types of chip-based cards: memory cards and microcontroller cards. Memory cards, such as a phone card, simply store information but cannot manipulate it. Microcontroller cards, on the other hand, offer full information and processing facilities.
Although memory cards dominate the market, says Dataquest, microcontroller cards are the fastest growing sector of the business. In 1995, the analyst found there were 93 million units in use worldwide. It predicts this will rise to 1.32 billion chips by 2001: the market value was $215 million in 1995 and will rise to $2.6 billion by 2001.
A smart card made by Hitachi lies at the heart of the Mondex experiment in Swindon, initiated by National Westminster Bank. Mondex is an electronic purse which allows a user to download sums of up to u500 a time from a terminal or by an adapted telephone connection.
The user can use Mondex to buy small items, such as a newspaper, cigarettes or sweets, without money changing hands. The Mondex card is swiped through a retailer's special till and the customer's account is debited. Mondex has extended the Swindon experiment to the universities of York and Exeter, where students can use the cards to obtain cash and as a library card and to vote in union elections. Similar experiments are being carried out in US universities.
Other companies have followed the lead set by Mondex including Visa, with its Visacash card, as well as Mastercard. Currently there is no compatibility between the different systems, but analysts expect that a degree of standardisation will emerge shortly.
'There are ISO standards that are adopted and recognised by all the big manufacturers. All the manufacturers know where they want to get to.
They are not quite there yet, but they will be in the near future, a maximum of two years,' says Duncan Brown, a senior consultant with the market research company Ovum.
A Mondex representative says standardisation was a key issue but one that will be solved in the next 12 months. 'The industry is very conscious that we need to have standard specifications,' he says.
In his view the standards will emerge as a result of pressure from the retail industry. Retailers will not want to have six or seven different terminals on top of their counters. The representative believes that eventually there will be one point of sale (Pos) terminal that will take all smart cards and credit cards.
Although the large retail chains and supermarkets are well equipped with Pos terminals, the smaller stores and high street shops are still mainly glued to the old till technology. If the Mondex and Visacash experiments take off, they could open the way for the introduction of modern PC-based cash terminals in many small shops.
In 1986, IBM introduced a specialised PC, the 4680 Store System, for the retail trade. The machine was aimed at larger retailers and high street chains such as Boots. It was linked to a centralised mainframe. The 4680 system and its successor, the 4690, were never aimed at small retail outlets, but smart card technology could change all that and open the way for IBM and other manufacturers and their resellers to market systems in smaller businesses.
Retail is not the only application that suits smart cards. Medical records could be held on a smart card carried by a patient. The card could hold details of previously prescribed drugs, allergies and other patient details so that when the patient goes to collect a prescription the pharmacist knows what drugs to prescribe and which not to prescribe.
Around the world governments and companies are waking up to the potential of the smart card as a means of storing and processing information. In Spain, the government is issuing about 35 million smart cards to people claiming social security. The Czech Republic, France and Taiwan are planning to introduce smart cards into their health services.
In Japan, telecommunications giant NTT has issued all its employees with a smart card which not only operates as an electronic wallet in the canteen but also allows the holder, with the required authorisation, access to different parts of the buildings as well as log on to the computer network.
Motorola, which pioneered the smart card, last month announced a contactless smart card which takes the technology a stage further. The advantage of the contactless smart card is that it does not have to be swiped through a reader.
The major existing application for the contactless smart card is the public transport systems around the world. Instead of buying a ticket which is examined manually or contains a magnetic stripe which is read by a machine, a traveller simply walks between two beacons which remotely read the card. Several transport authorities around the world, including London Transport, are evaluating contactless smart cards.
One of the main concerns for users of the smart card technology is that of security. A US report from consultancy Bell Communications suggested that smart cards could be electronically interfered with. According to Mondex, the report was referring to an earlier generation of smart cards and the technology has now been significantly improved.
'The motivation for a smart card as opposed to a memory card is security.
The computer on the card gives users the security they require,' says Motorola worldwide smart card operations manager Mike Inglis. Motorola has acknowledged that security is a key issue for the industry and uses digital signatures before any data is sent over a network.
The company compares the digital signature with that of a handwritten signature, which is unique to its owner. The signature is an additional piece of data that is encrypted by the sender using an encryption key.
The encrypted message is sent to the receiver, together with non-encrypted data, who uses an encryption key to decrypt the message.
The signature is compared with the message in clear text and if any discrepancy is found the data can be treated as suspect or rejected.
There are two types of cryptographic keys: the private key and the public key. Mondex, Motorola and the industry in general are moving toward the public key rather than the private key. Using public key encryption means that senders can distribute their public keys to anyone they choose. Only this key will decrypt a message encrypted with a corresponding key. The public key is held on the smart card and even its owner does not know what it is.
Analysts like Brown are convinced that the move toward public key encryption is correct. 'There is a slow but significant move toward public key encryption. The question is how much confidence the user has in it,' he says. 'The technology works, but it is now a question of getting people to use it.'
That may be harder to achieve than it sounds if past experience of the adoption of new technology is anything to go by. Several years ago one of the Scottish banks introduced the first automated teller machines in the country at its main Glasgow branch.
The bank expected that the terminals would be welcomed and widely used.
Instead it found its customers, whose salaries were paid directly and electronically into their accounts, mistrusted the systems. Instead of drawing off cash as they needed it, the customers simply used the machine or an over-the-counter transaction to withdraw all their salaries in one go. It took some years before the terminals became accepted and widely used.
But once the technology does find acceptance then there will be a considerable market for terminals and readers of the smart card. The smart card could provide a considerable boost to the PC market among smaller resellers , which up until now have not had a need or have not been able to afford a PC.
Some analysts have predicted that within a few years people will be carrying around a single card which contains their medical records, social security details, credit and debit cards, in-store loyalty cards and a wealth of other personal information. Brown thinks that this is an unlikely scenario, but he believes there will eventually be just two or three cards: one for financial transactions of all type, one for medical records and another for state details such as driving licence, insurance details, social security information and the like.
The smart card clearly represents a window of opportunity for the reseller channel, especially for those dealers working in vertical market segments such as retail.
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