Smart Card Alert

Smart Card Alert
John C. Dvorak's INSIDE TRACK
April 6, 1999
PC Magazine

Here We Go Again Dept.: According to some sources, the stolen-computer market has risen to $8 billion per year. IBM is proposing the use of smart cards to protect machines (mainly lap-tops). Only the holder of the smart card would be able to unlock the PC. Of course, for this to be effective a lot of "protected" lap-tops will have to be stolen, so the word gets out that they’re useless without the key. This might be more trouble than it’s worth, but at least it will introduce the smart card into the market. At first I thought the idea was dubious, then I realized it’s actually part of a grand scheme to promote the smart card.

Smart-card technology, which will inevitably catch on here—if for no reason other than that the whole world is adopting it—has been slow to market in the United States. I was just in France, where I had difficulty using old-fashioned credit cards; everything is done with smart cards. Every restaurant and two-bit street vendor has a hand-held smart-card reader that can extract money from your card instantly. U.S. bankers say the main reason smart cards are not in demand here is that the infrastructure for magnetic-stripe cards is so entrenched.

Of course, a smart card can have a magnetic stripe, too. When you see the little smart-card readers, you realize that the potential for small cash transactions is huge, and banks should be more aggressive. I believe that banks are simply waiting for the technology to pass into the public domain. The smart card was invented in France by Michel Ugon, in cooperation with Motorola, around 1979. Patents (the 17-year variety) were apparently issued into the early 1980s, and the most important ones are now expiring.

The French believe that the United States didn’t go with smart cards because the patent royalties would have cost banks more than they want to spend. What they want to spend is zero. The patents run out in the next year or so. Watch for the sudden emergence of smart cards after that.

I believe IBM is using the theft-deterrent argument as an excuse to position itself for the upcoming smart-card boom.

The company will have millions of machines that are smart-card—ready for small cash transactions over the Net. IBM is aware of the patent expiration, and it works closely with all the major banks. I’m sure the company is doing nothing more than preparation, while other vendors are scratching their collective heads. In fact, IBM was the lead vendor in a 1998 smart-card conference held by MasterCard, where it outlined the long-term game plan for deployment.

I’ve had mixed opinions about whether a smart-card reader will be the next PC peripheral, but I tend to think it will be after seeing the cheap French hand-held readers everywhere. These things suddenly emerged in Europe in a spooky way, which reminded me of the disappearance of vinyl records almost overnight as everything went to CDs.

IBM will offer a PC Card device, but few desktops have PC Card capability. I 5 aspect that the winner in this category will be a cheap USB plug-in card reader selling for $30 or $40. I also expect to see floppy disk adapters similar to the Olympus device that can read SmartMedia from Olympus cameras. I’m convinced that all small cash transactions over the Internet will be smart-card transactions. None of the attempts at micropayments have worked, and one company has already gone broke.

Meanwhile, banks are reluctant to put together a computer mechanism to make it easy to take sub-$1 transactions from regular cards, even though they could accumulate millions of dollars by doing so. Again, this can be rationalized only by a complex marketing scheme to roll out smart cards en masse and use their intrinsic mechanism for small transactions.

Banks do not want to muddy the water with any alternative schemes, hence their reluctance to make the Net amenable to micropayments in any other form. If the life cycle of a laptop is optimally 18 months, we must assume IBM’s implementation means that massive smart-card deployment will take place within 18 months. Get ready. You heard it here first.

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