Wooing users at crux of plastic problem

By Richard Braddell

WELLINGTON - For all the hype, the news about smart cards has been of delay clouded by arguments between two of their leading proponents, Visa and Mastercard, about whose system is best.

But the reality is that there has been little in the way of implementation. New Zealand's largest project is outside the financial sector, involving Telecom's new public phone system, to be installed later this year.

But the arguments, and the relative lack of progress, disguise a considerable amount of work behind the scenes which could lead to an explosion in smart card use that could start to become apparent in the next 12 to 18 months.

What sets smart cards apart from the commonly used plastic cards with magnetic encoded stripes is that they contain a silicon chip that stores data in much larger quantities. Equally important, they can work interactively and carry a number of processing applications that can be built in at the factory or added or removed, even remotely, at a later date.

In additional to being multi-functional, they will also have the added advantage of enhanced security through sophisticated encryption techniques.

Smart cards are likely to take off for a number of reasons. In keeping with Intel co-founder Gordon Moore's law that the data able to fit on a chip doubles every year, smart card capacity has been soaring, from 8 kb last year to an expected 32 kb at the end of 1999.

In France, they are already widely used in credit cards as a means to combat fraud, while they are also becoming popular in Europe because of their capacity to handle transactions without reference to a host database, thus avoiding high costs for European telecommunications.

With eftpos, they could cut telecommunications costs, which are admittedly not terribly high in New Zealand, by allowing authorisations below certain value levels, or with certain classes of merchants without reference to the host database.

They also offer a solution to Internet payment, potentially extending the device-centric SET (secure electronic transaction) digital signature protocol developed by Visa and Mastercard, by enabling the digital signature to be transported to any device that will accept a smart card.

In New Zealand, the banks have yet to take the plunge, but as the Bank of New Zealand's manager of smart cards, Kevin Donaldson, observes, they are not a product you can take to the market and expect the masses to instantly fall in love with.

"It's all about partnerships and alliances and developing propositions that deliver value to everyone," he said.

Mr Donaldson said banks will be able to issue cards with stored value and credit, but to fully leverage them they will want to put in other applications such as loyalty programmes involving other merchants. They will also need the ability to update and reload from automatic teller machines and devices such as personal computers and smart card phones.

"But there's still some water to go under the bridge," Mr Donaldson said. "I think that's why a lot of banks globally have been sitting looking at how we use chip cards, dabbling and doing some work with chip cards, but they haven't moved strongly into the environment yet."

In fact, the banks and other potential users are playing their cards close to their chests.

Finding the value proposition that satisfies banks, customers and merchants will not happen overnight.

Factors inhibiting progress are the absence of any existing infrastructure and the cost of implementation, although prices are falling quite fast.

An announcement by Microsoft last year that it would be developing a smart card operating system will help. But in the end, progress is likely to be evolutionary rather than revolutionary.

Quite possibly, the banks will roll out hybrid cards that have both the traditional magnetic stripe and a silicon chip, giving eftpos users and the like time to phase in new systems.

But unless there is a global revolution, smart cards may well come into their own first in localised uses. Universities,for example, might use them to control photocopier or Internet use, or access to networks.

As Mr Donaldson said, their use is only limited by the imagination.

A smart card drivers licence might have the standard information, while other details like medical or driving history would be encrypted for use by people with special access privileges.

But customer loyalty programmes such as air points may turn out to be the biggest driver. Customers would be able to find out their points and calculate redemptions and purchases on the spot.