Smart cards find it tough going

UNLIKE MOST DIGITAL TECHNOLOGIES, which roll over cultures like a Schwartzenegger movie, smart cards seem unusually sensitive to geography. Ever since the idea of embedding integrated circuits into cards was invented in France 25 years ago, the technology has flourished in Europe and Asia while going almost nowhere in the United States.

For years, smart-card enthusiasts have inferred from this that the United States was behind the times and would eventually come around. Eight years ago, CIO looked at smart cards and agreed, declaring that the popularity of the technology in Europe and Asia had "proved its mettle" and brought it to "the point where it is a viable option for a variety of applications."

A variety indeed. "The potential utility of smart cards goes beyond traditional ATM banking or calling-card applications to include transportation, pay television, manufacturing, security, medical and human services, marketing, shopping, travel, and agriculture," CIO wrote. The technology even promised to push computing down the path defined by the transitions of mainframe to mini, and mini to micro into a new era -- pocket computing.

It seemed logical that with all these target markets, smart cards would catch on in the United States. Yet, by and large, the landscape looks much the same now as it did then; adoption is widespread overseas and marginal in this country. It might be time to ask whether, instead of being behind Europe in adopting smart cards, the United States might be ahead of Europe in rejecting them.

In retrospect we would have been better advised to consider the competitive environment. Smart cards are naturally contrasted with "dumb cards," which come with a magnetic stripe, bar code or password. Both types of cards connect to a network; smart cards differ in using the network less. They hold their own data and applications and do their own processing, updating lists of transactions or balancing out accounts from time to time. Dumb cards connect with each transaction and rely on the network for everything but the initial contact and authentication. Another difference is that dumb cards are cheaper: The cards themselves cost a tenth as much or less, and their supporting infrastructure is simpler.

Thus from a strictly economic point of view, smart cards work best when telecommunication costs are high and uniform standards allow costs to be spread across many applications at once. Europe and Asia qualified on both counts. Phone calls were expensive and the national banking authorities were in a position to dictate standards. Neither consideration applied in the United States. The United States also had and still has a well-established dumb-card infrastructure, especially in the form of credit cards. Smart-card proponents have largely ceded the stored value function to dumb cards, at least temporarily. "Citibank and Chase ran a pilot program in 1998 that showed that most people felt satisfied with the credit and debit instruments they had," says David Asay, head of IBM's Smart Card team. Instead, proponents rest their cases on applications that dumb cards have a hard time supporting: so-phisticated authentication techniques, including biometrics and digital signatures; physical data security (no hacker is going to break into a card you have in your pocket); and wireless connectivity. Many in the industry think that the growing need for these features will compel a general adoption of smart cards, even in the United States. "If you want the full benefit of modern security methods, you need to have your device under your physical control," says Adam Shostack, director of technnology at Zero-Knowledge Systems.

These applications might indeed jump-start the industry, but this time around we should not forget the competition. "Mag[netic] stripes have a long way to go," says Jerry Sumner, associate director of product management at Arthur Blank & Co., a large manufacturer of plastic cards. Paradoxically, while smart cards might be edging away from stepping out of stored value applications, dumb cards seem to be stepping in, via extensions of the prepay concept now used to make phone calls. "There are possibilities in prepaid Internet access or prepaid customer support," Sumner says. "Retail stores could sell prepaid e-cash cards to people who don't have credit cards or don't want to use them online."

Meanwhile, smart cards are being squeezed from the other side by smart phones and Palm devices, which can do anything smart cards can and more. Smart devices are of course even more expensive, but they have the critical advantage of being more common (in this country), which means developers might prefer to write applications for devices.

In the long run, smart cards might be eaten up both here and overseas by dumb cards from below and by smart devices from above, leaving just the two competitors digesting their meals as testimony to the importance of always measuring a technology against its alternatives.

This story, "Smart cards find it tough going" was originally published by CIO.

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