Smartcards - a smart move by Europe?

Banks are implementing fundamental changes in the way they operate that go beyond just taking accounts online. On the card front, out go thick magnetic strips and in come smartcards that hold various account and users details, cutting the risk of fraud. At least, that's the plan.

In one initiative announced at the end of last month, Visa's member banks invested $150m to ease the migration from magnetic strip-based cards to smartcards. The main incentive behind the move is cutting card crime. Facilitating easier payment for goods over the internet is also a priority, and smartcards that slot into a PC, linked to a pin number typed from a keyboard, may well be the future for online transactions.

But Europe is facing problems as its member state countries introduce smartcards with varying degrees of enthusiasm. Banks look set to be the first big adopters of smartcards, spurred on by changes to banking regulations in relation to fraud. From January 2005, banks not using chips will be held accountable for all fraud charges.

Unsurprisingly, Visa is in the middle of implementing a seven-year chip migration plan to encourage all its member banks to do away with old-fashioned swipe cards. The company has more than 80 smartcard programmes in 35 countries and on the internet, with 23 million Visa chip cards.

But the varying degrees of adoption could cause problems as banks swap to smartcards.

The smartcard market is one arena where Europe has a definite advantage over the US. France and Germany are among the most advanced countries when it comes to smartcard adoption. The former is the home of many leading players, including Bull, Gemplus, Ingenico, Schlumberger and Detexis - a Dassault AT and Thomson CSF company. At the end of last year there were 62 million bank payment and in-store cards circulating in France.

The French government is currently rolling out 36 million national health cards - dubbed Carte Vitale - that will be made readable to 400,000 healthcare professionals. The chip on the card provides data on a beneficiary's benefits. Future versions will include medical information.

Companies such as Setec and Kalamazoo Informatique Sante already offer management software to help the health market, while Gemplus is developing workstations with a smartcard reader for the Carte Vitale and the Carte des Professionals de Sante healthcare professional's card.

France isn't the only country to take advantage of smartcards for health projects. Germany boasts Versichertenkarte, while Belgium and Spain are running social security projects involving smartcards.

Annop Ubhey, analyst at Frost and Sullivan, said: "From these projects you can see that it is not just the typical countries, like France and Germany, who have taken to smartcard technology. There are a number of smaller projects in Northern Europe which have the potential to offer a greater number of cards in years to come."

Several countries across Europe are already carrying out pilot projects with the aim of introducing smartcards for the general populace. In Germany, there are currently 45 million smartcards in circulation as part of Geldkarte, an e-purse scheme with credit and debit capabilities. Meanwhile, the Netherlands has 13 to 14 million cards in circulation under the ChipKnip scheme.

But it will be a long while before there is widespread adoption. Ubhey added: "The UK is slow but it is doing a lot of work to try and get smartcards standardised by between 2005 and 2007. There is still a long way to go."

One of the main issues dogging the widespread introduction of smartcards is the ongoing battle between banks and retailers over which side will foot the bill, as terminal and other equipment is upgraded.

Alan Laird, marketing manager for e-solutions at Bull, said: "It's a very pertinent problem. There is a big battle between banks and merchants as to who funds the replacement of the magnetic stripe with smartcard terminals. The retailers say it is the banks' problem and vice versa."

A lack of standards for multi-application smartcards also poses potential problems.

"There are a lot of closed smartcard projects in Europe at the moment, such as smartcards for use on university campuses to buy books or for local bus fares," Laird added. "But true multi-application functionality means being able to take a card from any vendor and use it in any terminal whether it is from Gemplus or Schlumberger. It will be quite a while before we see that."

The problem is that all smartcard manufacturers have proprietary operating systems which means the Mastercard/Visa vision of an open environment for smartcard development does not exist.

"All these issues are supposed to have been resolved, but with Java and Windows for smartcards on the market it is means that not a lot of openness is happening. There is a big fight over who will be the winner and become the de facto standard," said Frost & Sullivan's Ubhey.

In the meantime, there is the real problem that as some countries fade out magnetic strip terminals some countries could be left behind.

There's no doubt the smartcard market is developing. But unless countries, banks and retailers work harder to organise a unified roll out, it could be a long time before smartcards become a permanent feature in the banks' repertoire, and our everyday lives.