being placed on smartcards' ability to move Europe's financial system beyond that of the rest of the world -- especially with the prospect of a unified currency becoming more likely with each passing month.
Setting Standards
Since exploding on the scene in the U.S. three years ago, the Internet has largely remained an American institution. Although dozens of banks throughout Europe have also jumped on-line, most home-banking standards are being set within the U.S. by companies such as Intuit, MasterCard International, Microsoft, and Visa International. But while the near-term on-line future is being blazed in the U.S., banks and merchants in Europe
are quietly pioneering the infrastructure for a secure transaction environment based on chip cards that bridge the gap between retail and virtual sales.
According to the market-research firm Dataquest (San Jose, CA), 90 percent of worldwide integrated-chip-card shipments went to Europe in 1995, while only 2 percent headed to the Americas.
By the year
2001, Europe is expected to account for only 40 percent of these shipments, while Asia will command 25 percent and the Americas 20 percent.
Considering the lack of market penetration in the U.S. today, these figures can be interpreted as positive growth. But the reality of smartcard deployment in the Western Hemisphere is that many South American countries will be much more rapid adopters than the cautious banks of the U.S.
U.S. Lags Behind
A number of U.S. banks have thrown their support behind the electronic-purse systems pushed by MasterCard International and Visa International within the past year; t
he 1996 summer Olympics was heralded as the first step down the road to widespread consumer rollouts. However, squabbles over card formats, poor merchant outreach, and delayed commercial trials are all hampering the introduction of smartcards in North America. This situation is giving Europe the chance to command the lead in the
growing market
for card-based services.
"The U.S. market as we know it is not quite ready for smartcards," says Paul Campbell, spokesperson for Schlumberger Industries' Electronic Transactions Division. "We're all waiting for the U.S. market, but the market most likely to develop first by the year 2002 is the European one," agrees French journalist Charles Copin, a longtime follower of the smartcard industry.
Although countries such as Belgium and the U.K. are currently experimenting with chip cards, the country with the widest penetration of cards in both its financial and social structure is France. This is where the first true chip card was develop
ed in 1967 and where many of the major players in the chip-card industry originate. One of the core reasons that chip cards were adopted at such a steady pace in France was the pivotal role the government played in mandating their use.
In this environment, achieving significant penetration of chip cards was much simpler for banks, which pushed for chips to be installed on credit and debit cards. Now there are more than 25 million chip bank cards in France, with 85 percent of card payments made using a personal identification number (PIN) for security.
High Start-Up Costs
For European banks, there are multiple benefits spurring the move toward smartcards. For example, the proliferation of electronic-purse schemes is creating a new source of revenue for banks, which are facing growing competition from outside firms that offer a wealth of new financial services, from investing to banking.
Under many of the stored-value card systems now under evaluation, digital currency resid
es in an account-holder's bank, as opposed to residing on the card itself. In turn, banks stand to profit from the "float" that exists while consumers leave their digital cash idle on their cards. In France, for instance, about 3 percent of the value of prepaid phone cards is never used. This could translate to large unused sums of money in an electronic-purse system.
For merchants, however, the benefits of adopting a new payment type at the point of sale are less clear -- especially in the current climate, where as many as four different standards (CLIP, Mondex, Proton, and VisaCash) are competing in the electronic-purse market and boosting the cost of terminals. High costs are also forcing banks to take a cautious look at the business benefit of issuing chip cards that cost between $2 and $8 each, depending on the application, versus magnetic-stripe cards, which can be produced for just 10 cents each.
In addition, banks are reluctant to commit to new technology and new payment types before consu
mers are prepared to embrace them. Jean-Pierre Camelot, director of Groupement des Cartes Bancaires, the French bank association that's charged with exploring new technologies, estimates that it will cost French banks as much as $1 billion to introduce a widespread electronic-purse method in that country. This figure could skyrocket for rollouts in other European countries.
Other Competition
A key driving force behind chip-card use for bank cards in Europe is the idea of enabling off-line transactions by the use of PINs to reduce the fraud rate. With telecommunications costs at a premium in many regions of Europe, merchants have a strong incentive to move toward a chip-based approach that can support off-line transactions.
In addition to the reduction of fraud, two other main drivers for spurring smartcard adoption are the emergence of Internet commerce and the aforementioned possible competition from nonbank entities. "Smartcards are a key element of the future of information t
echnology," affirms Tim Baker, head of technical communications for Gemplus.
Currently, the Secure Electronic Transaction (SET) specification is being rolled out by MasterCard and Visa to safeguard credit-card purchases conducted on the Web. SET is based on the use of a digital certificate residing on a user's hard drive. Visa and MasterCard, along with Europay International, are adapting the specification so that it operates with a smartcard, rather than a PC, as the secure token that holds the digital keys.
Bringing smartcards into the Internet market can improve security for transactions while also giving consumers portability, since they won't be tied to their PCs to use them, says Michel Roux, general manager of the Gemplus Multimedia Business Division. This portability comes in handy when working with access-control applications on intranets and other corporate networks, another very big potential market for the cards, he adds.
Gemplus is currently working with Visa to launch a pilot t
his year that combines SET with smartcards. In addition, a variety of terminal vendors, including Dassault Automatismes et Telecommunications and VeriFone, are developing inexpensive plug-in smartcard readers for PCs. Also, modem manufacturer Hayes has announced that it's building smartcard support into its line of modems.
While the virtual world represents a promising market for chip cards, more immediate room for expansion comes from applications promoted by nonbank industries. This has forced banks across Europe into partnerships to prevent cards issued in loyalty programs from shutting out traditional financial institutions.
One such focus of competition in France runs up and down the railway lines that crisscross the country. Cards are already becoming a popular tool for aiding the transportation industry through contactless initiatives, such as the Tunnel Prado-Carenage in Marseilles, where one-quarter of the 30,000 cars that now travel through the tunnel each day pay their tolls with wirele
ss smartcards.
But in the next few years, local and national transportation authorities alike will be heavily promoting smartcard use for ticketing and retail applications. Groupement des Cartes Bancaires recently announced it was forming a working group to manage an electronic-purse project for transport and shopping services. The move was largely a defensive one, since the national French railway organization, Societe Nationale des Chemins de Fer Francais (SNCF), has been pursuing smartcards for ticketing applications for years. But instead of directly competing against SNCF, French banks are grudgingly agreeing to develop interoperable specifications that can be used for both transportation and retail applications.
Merchant Support Is Critical
"All present electronic-purse pilots have proved unsuccessful because they have not had enough merchant support," says SNCF treasurer Eugene Caffart. "We provide a critical mass of users, and we expect these users to pressure shops to a
ccept these cards later."
The merging of transportation and retail applications presages an effort under way in France to create a universal electronic purse that incorporates other payment applications, such as public phones. Phone cards, bank/loyalty cards, and transportation cards will represent the three largest chip-card markets by 2000, according to internal estimates from Gemplus and Schlumberger. Merchants are already turning a wary eye toward these types of closed systems in anticipation of a wider potential market.
One early outside merchant to take an interest in the SNCF project was fast-food giant McDonald's, which became a member of the working group in 1991. Still, the prospects for a universal card and nonbank competition remain slight in several European countries, despite rollout promises in the U.K. and Germany.
To be successful, banks across Europe will need to wring more revenues out of chip-based stored-value applications than they do in the lower-cost debit environment
, according to reports from Retail Banking Research. With merchant investments already extensive in their support of existing debit terminals, banks will need to help finance merchant migration toward this new payment standard over the next few years, the research firm adds. This will be a necessary step toward promoting consumer use, since many consumers are unlikely to adopt these new stored-value applications unless they are guaranteed widespread acceptance for low-value retail transactions, ranging from fast food to gas stations.
Where to Find
Ascom Systec
Mägenwill, Switzerland
Phone: +41 62 889 5211
Fax: +41 62 889 5990
Internet:
http://www.ascom.ch
European Banks Play Their (Smart) Cards
