A promising year
ahead?

It has been another interesting year for the smart cards industry. Widescale
deployments of the technology throughout large parts of the globe means that a
significant percentage of adults in the developed world now carry a smart card in
one form or another – whether as an EMV bank card, a mobile phone SIM card, a
smart ID card, an ePassport or a transport ticket. And the technology is continuing
to make its mark in emerging economies, with identification and SIM cards seeing
increased rates of market penetration. Figures from Eurosmart make encouraging
reading. According to the association, the industry’s activities increased by 27% in
2006 and should continue to grow at a rate of 20% in 2007.

However, there have been challenges, with commoditisation of SIM prices a major problem
for manufacturers, which have struggled to maintain and grow revenues in this market,
following a second quarter price plunge of more than 30% compared with the same period in 2005. Convergence has also been a key topic, with telecoms moving closer to the online world, and the payments and mobile sectors becoming more closely linked. We take a look at some of the issues that shaped the industry’s fortunes during 2006 and examine what 2007 could have in store.

Education
Education about and understanding of smart cards has grown over the past cards has grown over the past year. Members of the public are clearly becoming accustomed not
only to the concept of the technology but also using it. Media coverage of the technology has increased over the year, and it no longer seems to introduce elated stories with the phrase ‘so-called smart cards’ – surely a sign that the technology has entered consumer consciousness! Randy Vanderhoof, executive director, Smart Card Alliance, tells CTT how 2006 was a year that saw education grow: “Education about the role and appropriate use of technology for governmentissued smart cards has been the biggest story for 2006. In the US, we have seen significant government smart card programmes launched, including ePassports, the Homeland Security Presidential Directive 12 (HSPD 12) directive on Federal ID cards, TWIC, First Responder credentials, and a new citizen ID card project still under development. Understanding how to apply smart card technology to these large-scale
government-led initiatives using evolving standards, and with aggressive timelines and in challenging environments has made education and advocacy a primary focus for the alliance.” Education has brought with it a greater understanding of the technical issues involved in smart card deployment. According to Kevin Gillick, executive director, GlobalPlatform:“What has been particularly surprising this year is the ever-increasing level of understanding about smart card technology among the buying/ adopting community. This community is becoming increasingly savvy – and discriminating– in its examination of the options available. This is a very positive trend as the industry is more aware than ever of the benefits associated with deploying open and interoperable solutions. With an increasing number of interoperable technology choices available to the market, today’s knowledgeable acquirer of technology is less likely to embrace a highly-proprietary, vertically integrated model.”

Behind the scenes
Boardroom activities continued apace during the year, with changes in every part of the smart cards industry value chain. Philips Semiconductors was spun off from its parent company to become NXP, making the independent semiconductor firm number two in Europe and a top 10 player globally. A consortium comprising Kohlberg Kravis Roberts
& Co (KKR), Bain Capital, Silver Lake Partners, Apax and AlpInvest Partners took an 80.1% stake in the new semiconductor firm with Royal Philips retaining a 19.9% interest.
The creation of Gemalto following the mega-merger of leading French smart card
manufacturers Axalto and Gemplus finally took place in the middle of the year, after the
deal successfully negotiated anti-trust laws and received shareholder backing.
In the smart cards terminals market, VeriFone completed its acquisition of Lipman during
the final quarter of the year. “The creation of Gemalto has not had a significant effect on the market here [in the US],” says Randy Vanderhoof. “Both companies had strong customer relations and product portfolios going into the merger, so those relationships have not changed, and in some cases may have become stronger. It has also
created opportunities for Oberthur, G&D and Sagem Orga here since big customers such as the government want multiple suppliers, so these companies have been provided an opportunity as a second option.” Kevin Gillick tells CTT that consolidation offers a number of opportunities. “It results in fewer competing proprietary solutions and greater agreement on standardisation,” he explains. “It can therefore facilitate the creation
and proliferation of standards and drive the implementation of GlobalPlatform standards by our members and the wider industry.”

ID and ePassports
Unsurprisingly, the ID and ePassport markets caught the attention of pundits during the year. Following a shaky start in some countries, the number of states issuing the new documents continued to grow throughout the year, with an estimated 50 countries now either producing– or planning to roll out – ePassports. The majority of US Visa Waiver countries met the 26 October 2006 deadline to have an ePassport programme in place. Significant steps were taken in the national ID segment. In the UK, the proposed national ID scheme continued to be passed back and forth between the House of Commons and the House of Lords, with the government being criticised for its forecast costings of the scheme and with public opinion remaining sharply divided. However, the scheme continues to receive strong backing from a government which says it aims to combat what it claims is the big problem of ID theft in the country. While the national ID card talking shop
rumbled on in the UK, the Middle East was getting on with the business of making smart ID cards a reality. In the first half of the year, Qatar announced plans for a smart card-based national ID system to be rolled out over a three-year period. Using 64KB smart cards, it will serve as the official ID document for Qatari citizens aged over 16 as well as for foreign residents. The chip will store personal data, such as name, date of birth and address, plus the citizen’s fingerprints. Also in the Gulf region, the Sultanate of Oman
entered the second phase of its national ID programme, placing a 2.5 million card order
with Gemalto. And the Middle East wasn’t alone, with Spain launching its eID cards for 40 million citizens and South Korea announcing plans for a smart ID card.

Banking sector
In the banking sector, EMV, contactless technology and smart card-based pre-authorised
payments continued to attract attention, with the last two concepts being enthusiastically
embraced as ways for banks to penetrate new markets and expand their cards businesses. EMV continued to make a big impact, with the good news being that bank card fraud fell overall, although there was evidence that fraud migrated to less secure parts of the payments process. Figures released by APACS in November 2006 showed UK card fraud losses continued to decline in the first six months of the year. Total card fraud fell by 5% during the period, from £219.5 million to £209.3 million, mainly thanks to Chip and PIN. According to APACS:“Chip and PIN has made significant inroads in protecting consumers from fraud in the UK faceto- face retail environment, where losses have decreased by 43%, following on from a 35% fall the year before. However, card fraud abroad has increased by 16% as fraudsters, thwarted by the introduction of Chip and PIN in UK shops and cash machines, target countries that have not yet upgraded to the more secure technology. To help tackle this, the European banking industry has set itself the target of completing its chip card rollout by 2010.” Contactless payments moved up a gear, with several pilots being added to the raft of trials and rollouts already taking place in North America and parts of Asia. Visa reached a milestone in the acceptance of its contactless payment offering– Visa Contactless – by surpassing 20,000 acceptance locations in the US alone. And in the middle of the year, MasterCard revealed that more than 10 million PayPass-enabled cards and devices had been issued to consumers worldwide and approximately 32,000 merchants were accepting PayPass. In February 2006,
MasterCard announced it had teamed up with the UK’s Royal Bank of Scotland Group to
launch a contactless smart card-based trial aimed at targeting payments below 15 euros, while later in the year it launched the first commercial example of PayPass in Europe in partnership with Turkey’s Garanti Bank. Behind the scenes, the industry has been involved
in a raft of initiatives aimed at tweaking standards, educating end-users and informing payments organisations. Greg Pote, chairman, the Asia Pacific Smart Card Association (APSCA), told CTT: “The association has organised seven contactless seminars
and forums in the region since December 2005 for banks, payment associations, mobile operators and transport card scheme providers.” In the US, contactless technology also captured the imagination of the payments industry, and the Smart Card Alliance responded accordingly. Its contactless payments council has 40 organisations contributing to white papers, conferences, webinars and media outreach and educational activities.
“We have created sub-committees to bring in the retailers and the issuers together with the industry providers and payments processors to work out issues that are slowing down contactless adoption,” says Randy Vanderhoof. “We have also taken a leadership role to challenge media reports that contactless smart cards may have vulnerabilities that could result in fraud or ID theft. These misleading reports by the media and other groups have been addressed and corrected by statements on the Smart Card Alliance website and through media outreach.” At the technology level, EMVCo established its Contactless Working Group during the year. A document outlining the business requirements
for contactless technology was finalised by this working group in September and it will form
the basis for the future standard contactless cards and terminals.

NFC and convergence
Just as contactless smart card deployments grew, Near Field Communication (NFC) began to attract attention. Expected to follow a similar development curve to contactless technology, the technology has been praised by consumers for its convenience and ease of use as well as the‘coolness’ of making transactions with a mobile phone.
The first commercial rollout of NFC was announced in 2006 by Philips Semiconductors,
Nokia, Vodafone and Rhein-Main-Verkehrsverbund (RMV), the regional public transport authority for Frankfurt Rhine-Main region of Germany. In this deployment, Nokia 320 mobile phones are being integrated with NFC technology to allow transactions to take place with a swipe of the phone.

Travel
In the transport ticketing market, an order from China’s Guangshen Railway Co was a boost for disposable contactless tickets. The order – for 125 million disposable contactless tickets using Mifare UltraLight technology over a five-year period – is believed to be the largest combined order of its kind.

Telecoms
The telecoms segment had mixed fortunes during the year. The good news was that there were strong deliveries of SIM cards in many markets. Furthermore, positive steps were made with added memory, unique applications and new technology, such as high-speed protocol. Industry conferences such as 3GSM in Barcelona saw insiders in an upbeat mood when discussing the opportunities for growth, such as contactless mobile payment, mobile TV, multimedia content and service management and convergence. According to Paul Beverly, executive vice president, marketing, Gemalto: “There has been a large percentage of growth from emerging markets with entry-range SIM cards being used.
But we’re also seeing growth in North America and Europe, where operators are using the SIM to launch new services such as mobile TV, prepay and loyalty services. There has been a pickup in China and national operators have placed large orders. In
2007, 3G is a real possibility in China, since the country is expected to implement this technology in 2008 for the Olympic Games, which will fuel further growth.”
But there was disappointment in the industry that the sale price of SIM products continued to decline, with a price war between vendors hitting revenue figures.
“So far, it’s not clear how pricing will develop next year, but we do think this trend will slow
down in 2007,” says Paul Beverly. “What we do know is that mobile operators are telling us
that the SIM card is the key to the relationship they have with their customers and the SIM is the platform operators increasingly use to launch their new services.”

Into 2007 and beyond

Heading into 2007, the industry is generally upbeat. “This is a great time for our industry
and the future looks very bright,” says Randy Vanderhoof. “There is some very promising
technology on the horizon such as NFC-enabled mobile phones, network-addressable smart cards, higher speed SIM interfaces, contactless transit and financial card convergence opportunities, and Microsoft Vista-led smart card integration at
the desktop level. Now is a good time for smart card associations around the globe to begin to work together to exchange information and bring industry suppliers and end-users together to keep the industry moving on the right track.” Consolidation between all players in the hardware and software value chain is likely to continue to be a theme in the coming years. “It makes sense when you look at the business we are in,” says Paul Beverly. “Customers are asking us to bring more than smart cards, and they’re looking to
us to help improve the user experience. This means we need to be able to offer products and services deeper in the value chain.” There will continue to be a lot of creative
development around form factors, with innovation and time to market the key success factors. Building on the growing number of ePassport rollouts new form factors to be seen in the real world will include contactless inlays for ePassports, corporate badging/one-time passwords and plug-in formats. Standards work will continue to be important. As Kevin Gillick says: “I believe that the days of tightly integrated venor, market or licationspecific
implementations are quickly closing. I see a growing number of standards-based deployments and am very excited that GlobalPlatform is in a position to offer solutions – developed through member collaboration – that apply across the entire smart card infrastructure.”