Smart Cards MD823 October 6, 2003

The Smart Card Value Proposition Secure storage for sensitive data and monetary value Decreases fraud rates compared to magnetic stripe cards Supports local transactions (no network connection required) Handles cash, micropayments, and debit as well as credit Convenient, familiar form factor

Smart Card Trends Larger memory and faster transaction speed of new chips (from 32K to 64K) New Java smart cards support multiple applications Integration with biometric data increases authentication and reduces theft issues Contactless cards never have to leave the pocket or purse to function at turnstiles or to open doors

Issues for Smart Card Adoption Cost of chip cards vs. magnetic strip cards Complex and expensive infrastructure requirements (card readers, optical scanners, local terminals, etc.) Lack of compelling applications or features to motivate consumer interest and use Lack of support by merchants and reluctance to subsidize infrastructure costs by card issuers Some concern about privacy and protection of data on the chip

Drivers for New Smart Card Programs Worldwide Government mandates –Citizen ID cards, electronic passports, military ID cards Increased security concerns –Access cards Regulatory requirements –Health system cards Transportation systems –Contactless fare cards

Government Drivers US Common Access Card (CAC) smart card program –Department of Defense initiative launched in 2000 –Target is to issue 4 million cards to military and government employees by April 2004 –2.8 million CAC cards issued to date Had revitalized dormant US smart card market, especially since combined with Homeland Security measures –Transportation Worker Identification program –Biometric passport with embedded contactless smart card chip and stored biometrics slated for 2004

MyKad Smart Cards in Malaysia Multipurpose smart card issued by Malaysian government to all citizens –2 million cards issued to date –Designed to host both government and commercial applications on one card National identification, passport, health card and drivers license Stored value card for ecash and purchases

A Tale of Two Cities: New York and Hong Kong Manhattan Smart Card Pilot Project –Fall 1997 to Fall 1998 –Sponsored by Citibank and Chase Manhattan Bank, with Visa and Mastercard –Most ambitious smart card rollout in the US up to that date –Results widely viewed as the kiss of death for US smart card adoption for the foreseeable future

New York Pilot (cont) Free smart cards sent to Citibank and Chase credit card holders in Manhattan Cards served as stored value (debit) cards 600 merchants on upper West Side recruited to install special terminals to accept smart card payment Users could also add value from bank accounts to their cards through connecting secure card readers to their home PCs

Results of New York Pilot Frequent failure at point of sale due to technical problems with terminals and lack of staff training –More than half of the participating merchants dropped out before the end of the pilot because of problems or lack of customer demand Complexity and unfamiliarity of adding value via home readers made this a little-used option –Few of the customers who received the smart cards ended up using them regularly Conclusions –Multiple factors have to come together to support a successful smart card program; the New York pilot lacked most of these factors

Lessons Learned Smart Card Success Factors –Need a critical mass of regular users to justify the investment in infrastructure –Smart card use must be more convenient or more cost effective than currently available systems –Users and merchants need initial education in how the system works –Technology must be robust and reliable

Hong Kongs Octopus Card Launched in 1997, same year as Manhattan pilot Focused on contactless card for urban transportation system with multiple Hong Kong transport companies agreeing to accept single fare card and to install readers in all busses, trains, ferries, etc. as well as kiosks to buy and top up cards

Results in Hong Kong By 2003 more than 95% of Hong Kongs 6.7 million residents regularly use the Octopus card Card use has spread to encompass debit payments at convenience stores, parking lots, supermarkets, Starbucks, etc. Many apartments complexes adopting Octopus card as a security device Nokia has created special Octopus-enabled mobile phone Octopus is a commercial and popular success

Smart Cards in Your Country: Group Discussion Discuss all the factors you can think of that influenced the results of the New York smart card pilot in NY in 1997 and the launch of the Octopus smart card in Hong Kong that same year –What were the most important contributors to success and failure in each case? Consider the situation in each of your assigned countries relevant to these success factors Discuss whether each country would be a promising place to launch a commercial (non- government) smart card program today (give reasons why or why not)