Smart Cards: The Ultimate Plastic
Empty out the contents of your wallet, and you're likely to find a jumble of plastic and paper--credit cards, a driver's license, a health-care ID, perhaps a few frequent-flier cards. You'd also find a fistful of dollar bills and loose change. What if you could combine all of those things into one neat credit-card-size package? Instead of fumbling for coins when you make a phone call or hop onto the subway--just insert the card into a special slot. Doctor's appointment? The card contains your medical history and insurance information.
That's the promise of smart cards--slips of plastic that resemble a credit card, but with one big difference: Embedded in them is a computer chip that can store 500 times the data of a magnetic stripe card. For now, most smart cards handle a single task, such as storing electronic "money," which can be downloaded from your bank account.
BIG LEAP. In the years ahead, though, a single card might handle many of the tasks mentioned above. Either way, the marriage of silicon and plastic could be the biggest leap in consumer convenience since automatic teller machines.
For millions of people around the globe, they already are. In Europe, where phone rates are high, smart cards have long been a popular alternative to credit cards, which require an expensive phone call to a central database to authorize each transaction. The chips in smart cards make it possible to authorize a purchase on the spot. But in the U.S., where telephone costs are low and magnetic-stripe credit cards are the plastic of choice, there has been little interest in smart cards. Analysts estimate only 2% of all smart cards are used in the Americas, while Europe claims 90%.
That's about to change. After years of predictions, smart cards may finally be poised for takeoff in the U.S. Banks and other card issuers say the capabilities of magnetic stripe cards are tapped out. They see smart cards as a way to offer brand-new services. A single smart card, for instance, can be used to buy an airline ticket, store it digitally and track frequent-flier miles.
And there's a bigger force at work: the Internet. As electronic commerce gains steam, smart cards provide a crucial link between the Web and the physical world. The same digital money used to buy things on the Net--including purchases under $5 for which credit cards are prohibitively expensive--can be downloaded from your online bank account onto a card. That card could then be used to buy milk at the corner grocery store. Smart cards and E-cash could make up half of the $7.3 billion in online sales expected by 2000, figures market researcher Jupiter Communications Inc.
Such possibilities are fueling heady forecasts. Research firm Dataquest Inc. predicts that by 2001, smart-card shipments in the Americas will grow to 6.8 million, or 20% of the estimated 3.4 billion units worldwide. "The Internet combined with the development of electronic cash will finally start the smart-card revolution in the U.S.," says Keith S. Kendrick, senior vice-president, smart payments, with AT&T Universal Card.
There's already a flurry of activity. Credit and debit-card companies from AT&T to VISA are migrating from magnetic stripe-based cards to ones with microchips. Hewlett-Packard Co. on Apr. 23 said it would spend $1.18 billion to acquire VeriFone Inc., which makes smart-card readers, as part of a broad push into electronic commerce. Sun Microsystems Inc. is promoting its Java software as an operating system for smart cards. And in April, GE Capital took a stake in Gemplus Card International, a French smart-card maker (box). "Everyone's getting positioned," says Mike Nash, the chief executive of DigiCash, a Dutch supplier of E-cash software that has just moved its headquarters to Silicon Valley.
This optimism will be put to the test as several smart-card experiments are rolled out in the U.S. this year In October, Citibank and Chase Manhattan Corp. will issue 50,000 cards on Manhattan's Upper West Side, where 500 merchants will accept the cards for payment. The pilot was pushed back a year when Chase switched from proprietary technology to E-cash software from Mondex International, in which the bank took a stake last year. AT&T, another Mondex investor, is testing a card at its Jacksonville (Fla.) Universal Card headquarters, where employees use them in the cafeteria. This summer, it will test Mondex on the Net. Says Janet Hartung Crane, CEO of Mondex USA: "This year and the next are lab years."
HUGE HURDLES. If past experience is any indication, these latest pilots will have to work overtime to lure both consumers and merchants. The most ambitious U.S. smart-card trial to date was hosted by VISA, which allowed visitors to last summer's Olympics to use the cards at 1,500 participating Atlanta merchants. Technically, it went off without a hitch. But not enough merchants participated or were properly trained to drum up excitement--and purchases. Similarly, in San Francisco, Wells Fargo & Co. has been testing a smart card over the past year using the Mondex system among 500 employees. They can use the card in the company's cafeteria as well as at a handful of nearby stores, delis, and coffee shops. "We love Mondex sales. There's no cash, no paperwork involved," says Chelsea O'Hara, store manager at Papyrus, a card shop two blocks from the bank's offices. The only problem: "It hasn't brought in much business," she says.
Just like ATMs, which took a decade to catch on with consumers, smart cards may take years before they reach widespread use. For one, they require a massive retrofitting of the magnetic stripe and ATM infrastructure that has been built up over the years. There's also the matter of standards, which will be needed to ensure that smart cards from different suppliers will work in the same card readers. VISA, MasterCard International, and Europe's Europay are working on a common format.
The pieces are starting to fall into place. Many PCs, keyboards, and Web TVs, for example, will be shipped with smart-card readers in 1998. Microsoft Corp., along with HP and other hardware makers, is pushing a smart-card specification for PCs and will include electronic wallet software in a version of its Internet Explorer browser due this summer. And in the Manhattan trial later this year, Citibank and VeriFone plan to test personal ATMs for downloading money into a smart card from home.
But for the best take on the future of smart cards, ask the next generation of consumers. Drew Pullman, a junior at John F. Ross high school in Guelph, Ont., which began a communitywide pilot in February, fits the bill. He uses his card to buy lunch, CDs, clothing, and gas. He loves the convenience. "It's just like cash, except better," he says.
Now that's a ringing endorsement.
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