The Future of Smart Cards in the USA

By Joe Naujokas, Naujokas & Associates

It’s the time of the year to dust off the crystal ball and look into the future. My focus this year is on the USA because of its intense activity in Smart Cards (SC) in 2005.

The ICMA Global Card Survey clearly shows that the USA has lagged behind in SC usage. The GSM system is not used very extensively in the US, so there is little demand for SIM cards. Also, there is no business case for SC credit cards as the US financial transactions are nearly 100% online and USA does not have a central banking system to force the use of SC in financial systems. Since losing the lawsuit on the credit/debit cards issue, VISA and MasterCard are in no position to force the retailers to install SC readers. The SC with contacts (ICwC) is on its own to prove its business worthiness and that is not going to happen in 2005.

Now the Contactless IC Cards (CICC) is a different story. The CICC is attracting consumer interest but much needs to be done on an infrastructure level for significant market penetration in 2005, however that is beginning to show signs of change. Sheetz, a major petroleum/convenience store retailer with over 300 stores across six states, has announced it will install MasterCard® PayPass™ readers at all its stores in 2005. I believe this will be rapidly copied in this market where the CICC has already been proven to be popular with consumers.

The mass transit application will continue to grow because of its appeal to consumers and the mass transit administrations.

Recently, the Washington Metro system mandated the use of Contactless Cards in its parking garages due to theft problems. This has led to an increased demand for CICC’s in the system. This also leads the way to use the transit cards in other related business around the transit stations, but installing infrastructure will continue to be a delaying factor.

ANSI is on a fast track to issue a new standard for limited use (read “low cost”) CICC (also called LUCICC). This effort has the full support of Mass Transit Administrations in the USA who want to switch over completely to CICC but still need cost competitive tickets with the mag stripe ticket. While I expect the standard to be completed in 2005, implementation will be slow and it will take a few years to replace mag stripe tickets in this market.

The USA will begin to issue passports with CICC technology in March 2005, as will other countries, in order to comply with International requirements (Card Manufacturing November/December 2004). This is the start of the first large open system to employ CICC and its success will have a profound effect on other CICC markets.

The US Government is the elephant in the USA SC business, but hasn’t decided when or where to sit down yet. The ISO standards activity that the USA started in 2004 is now questionable due to the new ANSI specification being promoted by NIST, the original sponsor of the ISO/IEC 24727 Interoperability Standard. The US government decision on which way to go is scheduled to be made February 27, 2005. Regardless of the decision, progress will be slow in 2005 because vendors will now be wary of another change down the road. However, the new proposed NIST standard will allow a much lower cost chip, which I believe is being done to pave the way for a National ID Card based on IC machine-readable technology.

The new USA National Intelligence Reform Act of 2004 contains an amendment mandating the federal government’s Secretary of Transportation to establish driver’s license minimum standards for the states within 18 months. One item being mandated is a machine-readable facial image biometric. The only practical solution is an IC card, so the only question remaining on the card technology is “with contacts” or “contactless.” I am betting on contactless technology. The same law also mandates a new secure social security card, but it is not clear that this will be a SC.

A battle is taking place between the SIM SC and Flash Card (FC) technology for implementing contactless credit authorization in cell phones, PDAs, laptops and perhaps even cameras. I believe the flash card will eventually win this segment. All these devices already have flash card readers, and it is certainly logical to place FC’s in cell phones to store photos. Cell phone operators would prefer that the photos be exclusively sent on their systems, but competition will eventually prevail for consumer ease. I predict that card issuers will eventually begin offering flash cards with CICC capability with their standard credit cards, but not in 2005.

Finally, as China rolls out their National ID Card, they will find themselves with excess card manufacturing. I think China will be a major player in global IC card manufacturing. If you don’t think so, ask yourself how many holiday gifts you received that were not made in China.

I think that 2005 will begin to establish a huge market for SC in the USA, and that we could probably expect card manufacturing revenue in North America to approach and perhaps exceed Europe in 2006. What do you think?