Compaq embraces smart cards
Ken Kerr, analyst, Gartner
Financial companies have failed to popularize so-called smart cards in the United States, but the new effort is different in several ways, which could mean success this time. With the backing of American Express and Visa International in combination with three major card issuers, millions of the cards are expected to enter circulation this year.
And with each card that's issued, Sun Microsystems makes a little bit of money as a royalty for its Java software, used to run the software on the tiny computer inside the card.
Also backing the smart-card push is Compaq, which announced Monday that its home computers will come with smart-card readers, making the cards useful for purchases over the Web. Other PC makers are expected to follow suit.
Sun President Ed Zander said at his company's JavaOne conference Monday that Sun spends hundreds of millions of dollars researching Java, but the software technology still is "an investment"--implying that the revenue from using Java on smart cards, cell phones and servers doesn't make a profit.
If Sun makes just 10 cents a credit card, that would mean $700,000 in revenue for the 7 million Java smart cards Visa expects to issue by the end of this year--not trivial, but a fraction of the roughly $4 billion the company expects to make this quarter.
While millions of smart cards will be shipped into the U.S. market, a card by itself is useless. "We are definitely creating a critical mass of cards," said Patrick Gauthier, senior vice president of smart-card applications at Visa. However, "a smart card is like a TV remote control: It's a great tool, but you still need a TV to make it useful."
Gauthier argues that another essential ingredient for success--readers and uses for the new cards--are on the way. Improvements to security and convenience will appeal to customers, while stores will favor the technology to offer incentives to keep customers, Gauthier said.
The change comes at a critical time for the credit card industry. Financial institutions have been accustomed to profits from their credit card groups, but that is likely to change.
"We anticipate a more difficult operating environment for the industry during the 2001-2002 timeframe, reflecting escalating credit card losses and slower revolving consumer debt growth as higher unemployment works its way through the economy," ABN AMRO analyst Andrew Collins said in a report last week.
Gartner analyst Kenneth Kerr says Compaq's announcement that its home computers will have smart-card readers built into them represents a huge step forward for Internet transactions.
One key reason smart cards may finally catch on is diminishing costs. In the past, each cost $5 or $6 to issue, but anticipated higher sales let Visa introduce a new model that costs the issuer only $2.89.
That's still a lot more expensive than the 30 cents to 50 cents a magnetic-stripe card costs, Gauthier acknowledged, but the price drop was enough to change banks' attitudes from "Why bother?" to "Why not?"
Sun isn't the only one that stands to gain. IBM actually wrote the Visa smart card's "virtual machine"--the crucial code that lets Java software run on Visa's smart-card chip.
Several stars have aligned in this latest smart-card push. First is the aggressive backing of American Express and Visa, though MasterCard remains lukewarm. And Visa has won the support of three of the top 10 card issuers: First USA, Providian Financial and Fleet Credit Card Services--the third-, eighth- and 11th-largest card issuers according to a recent Deutsche Banc Alex Brown report.
Through these banks, Visa conservatively estimates that 7 million smart cards will be issued in the United States by the end of the year, Gauthier said.
At Providian, nearly all new cards issued are Java smart cards, said Chuck Johnston, a vice president at Providian. Hundreds of thousands of people have signed up so far, and the company will have millions distributed by 2001. Between 1 percent and 5 percent of Providian cardholders have them right now, he said.
Support from PC makers is another key factor. Gauthier expects Compaq's competitors to follow suit, a move that would fulfill Sun Chief Executive Scott McNealy's exhortations that computer makers include smart-card readers.
"Because Compaq is going to do it, I suspect the others will soon," Gauthier said. PC makers will increasingly support the smart-card readers with software that ties into security-conscious partners such as banks, he added.
In addition, many banks are giving smart-card readers away for free. Providian plans to give away the first 50,000 readers, Johnston said, after which they'll cost $19.95 plus shipping.
Finally, the newest smart cards work as credit or debit cards, as opposed to previous smart-card generations that stored cash, an unfamiliar concept for U.S. buyers.
What's it good for?
But the key factor in spurring adoption will be finding something useful that can be done with smart cards. This, argues Gauthier, is where the Java smart cards distinguish themselves from their predecessors: Each card can run a variety of programs, making them configurable for different banks or retailers, whereas earlier cash cards were tied to a single niche market.
Cash cards "were basically single use," he said. "There is limited utility unless there are lots of devices to use it."
One touted benefit of smart cards is the increased security for online transactions and the like. Requiring the physical card and a password that unlocks it for use makes it harder to forge an identity.
Another benefit is customer loyalty. The Visa smart cards come with software that lets retailers instantly reward repeat customers with special offers.
These customer-loyalty programs, while designed to appeal to retailers, should also encourage customers to switch to smart cards. "We're going to ask customers to do stuff differently. The best way to do that...is to recognize it and have an intelligent reward system," Gauthier said.
First USA offers its smart-card users a 5 percent cash-back offer with merchants participating in its program, including Amazon.com, Dean & Deluca, CDNow and Outpost.com.
But just as early home computer makers struggled to come up with ideas for uses besides word processing and filing recipes, credit card companies are anxious for new smart-card uses.
American Express last year hosted a contest called Code Blue for its Java-enabled Blue card, offering programmers $50,000 to come up with new uses. Visa announced its own contest Monday, offering two winners not only $75,000 each but also the promise that banks will use the software and that the winners will receive royalties.
Igor Fisher of Tuebingen, Germany, won the Code Blue contest with his idea for storing a secure list of Web page bookmarks and associated passwords on the cards. Others came up with ideas for using the cards as concert tickets or gaining access to secure MP3 files.