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February 2, 1999

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Subject: Re: Smart Cards
Author: cirus

rp,

Funny you should ask. I'll apologize up-front in case this becomes a long post. Go grab yourself a fresh cup of joe before you read on...

I have been working on developing a part of Nortel's smart card & eCommerce strategy for a few years. We've been playing with smart cards for about 6 years now and developed Bell Canada's "QuickChange" card ("LaPuce" in Quebec). We also have first hand experience of many of the applications that have and are being used in North America today.

Background

Smart Cards are not new. They were invented and widely used in Europe well before they came to these shores. The reasons most often cited are the relatively high rates of card fraud and the lack of cost effective telecommunications infrastructure. The predominant applications were, and will continue to be Telephony (public and cellphone), Banking (eCash), Leisure (loyalty), Healthcare and public transportation.

Current state of the industry

Most people equate smart cards with eCash, especially in light of the public trials taking place in the US and Canada in the last couple of years.

In addition to providing custom smart card solutions to our telephone company clients, Nortel was directly involved in initiatives undertaken by Visa, MasterCard and American Express.

Unfortunately for the financial institutions, many of the public eCash trials have concluded with a less than roaring success (some of you may be familiar with the Guelph, Kingston and Barrie trials in Ontario).

"Unfortunately for the financial institutions, many of the public eCash trials have concluded with a less than roaring success..."

It is widely known that the Guelph and Kingston trials were shut down last year, although the Barrie trial has recently expanded into Geogian college. The underlying reason for the limited successes seems to be that consumers need a more compelling reason to carry another card in their pockets, wallets or whatever. Furthermore, given that they already have a plethora of payment options - Cash/Debit/Credit, a stand-alone eCash card is not solving any problems.

In hindsight, the FI's are now retrenching, trying to define compelling mutli-application suites (e.g. eCash+Loyalty, eCash+Debit, eCash+Credit etc.) and in the shorter term are focusing their IT resources on the more immediate Y2K problem.

However, that's not to say that the industry is at a standstill. Far from it. Current figures show that there are currently >1Billion cards in global circulation. This is forecasted to grow to 3.5-5B by 2003 at a CAGR of >25%. Most of the growth will occur in Europe, followed by North America and Asia. The largest growth sectors will be telephony, banking, leisure, ID, health and transportation in that order.

So, who are the big players?

Naturally, the banks and financial institutions are involved. All the CDN banks are members of the Mondex Canada consortium (planning a new trial in Sherbrooke, QC this year). BNS is continuing to play with Visa Cash in Barrie in addition to its Mondex participation (Mondex is owned by MasterCard). There are similar Mondex affiliations in the USA, Latin America, Asia etc. Visa and its member banks have a similar structure.

Many of the NA telephone companies are also keeping a close eye on the proceedings, particularly Ma Bell (also check out BCE Emergis TSE:IFM) and some of the larger NA and European companies.

On the equipment side VeriFone (owned by HP) is by far the largest player in the retail POS market. Others include KeyCorp (australia), Intellect (australia), Bull (france), DeLaRue (UK), Dionne (UK) and Banksys (belgium).

On the infrastructure side there's Nortel, Lucent, Cisco, Sun Microsystems et al, not to mention the security guys - Entrust (majority owned by NTL), Verisign and Certicom to name a few.

The companies making the cards are Gemplus (private french co), Bull, Schlumberger (yes, the oil services co), G&D, Siemens, Orga, Oberthur, Motorola and a few other smaller players.

"I have no doubt that the people supplying the chips and cards will make some money but this will quickly turn into a commodity business."

The biggest companies making the chips that go inside the cards are Siemens, ST Microelecronics, Motorola and Hitachi.

Finally, there are the systems integrators who take various companies components and build them into turnkey solutions - IBM, ICL, 3GI, CyberMark et al.

As I mentioned above, the industry is now migrating to multi-application cards and standard (card) operating systems. Most companies such as Gemplus and Siemens have proprietary O/S's. However, they are also associated to consortia with Visa and MasterCard that are developing industry standard O/S's. Visa will use Sun's JavaCard, MasterCard are going it alone with MultOS, but claim it will support JavaCard. Last October none other than Mircosoft entered the fray by declaring that they're developing a "Smart Card for Windows" O/S, based on a detuned WindowsCE.

Who's making the money?

I have no doubt that the people supplying the chips and cards will make some money but this will quickly turn into a commodity business.

No doubt the applications developers and system integrators will make money too. But IMHO, those who stand to make the most are the FI's (of course), companies providing network infrastructure to the FI's (and collecting the network tolls) i.e. the telco's, the transaction processors (like EDS, IBM) and the manufacturers that produce the various infrastructure components.

I have only scratched the surface here (and my lunchtime is over). Those particularly interested in this subject and eCommerce should check out some of the following for more info:

www.smartcardcentral.com

www.chipcard.org

www.multos.com

www.opencard.org

www.smartcardsys.com

www.smartcrd.com

www.scia.org

www.mondex.ca

www.protonworld.com

www.visa.com

www.java.sun.com/products/javacard

Plus the websites of many of the companies mentioned above.

Happy Reading,
Tony


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