Background information: The Smartcard: Consumer Buying Power

Imagine carrying a small plastic card chronicling your complete medical history. Or a card for making a phone call from a pay or cellular phone anywhere in the world. Or for ordering a broadcast of the championship boxing match on a moment's notice. Or for handling all of your banking without setting foot in a branch. Or for paying for a novel at the airport newsstand as you rush to your flight. For many consumers in Europe and Asia, such cards are real, not imagined. They're smartcards, and they're coming to the United States.

Smartcards are plastic, credit card sized devices embedded with powerful microchips the size of a fingernail. By facilitating faster, more complex transactions while simultaneously curbing potential fraud, smartcards are beginning to revolutionize how consumers conduct their daily business. Most pay telephones in France and Germany accept only smartcards, and numerous banks throughout Europe are experimenting with them as a means to cut costs and add convenience for customers. Newer applications are forthcoming, including 'electronic purses' which store cash for everyday purchases at fast food restaurants, newsstands or elsewhere. These smartcards, by supplanting smaller denomination currencies, have the real potential of creating a 'cashless society'.

Although the U.S. has been slower to embrace the technology, several important smartcard trials are now underway, with the market here expected to grow rapidly by the end of the century. Newer applications such as banking and pay television helped sales of smartcard ICs reach a market size of approximatively $500 million. About 80% of these chips will be used in Europe, but North America and Asia should grow to comprise two thirds of the market by the year 2000, when sales are expected to be of the order of $3 billion. Within a decade, over a half billion consumers worldwide will be conducting trillions of dollars in annual cash transactions with smartcards.

Smartcards will more than revolutionize how we shop and bank. Their integrated circuitry represents a new frontier for semiconductors. For several years the buzzword in the industry has been integration - the combination of a widening variety of increasingly sophisticated functions on smaller slices of silicon. The smartcard IC integrates hardwired logic, microcontrollers and advanced cryptographic computers to secure personal data all supporting the most powerful memory devices available in the world today.

SGS-THOMSON Microelectronics was a pioneer in adapting smartcard technology for consumer use. The company's product family incorporates innovative circuit features, the latest non volatile memory technology in the market and the use of advanced cryptocomputers providing unequaled data security. SGS-THOMSON has sold more than one billion smartcard ICs and more than half billion kbytes of embedded EEPROM since 1986.

According to internal sources, the company had in 1996 a dollar volume market share of approximatively 35%.

Smartcard technology was introduced in the 1970s, but its first breakthrough did not occur until early 1982, when SGS-THOMSON's French forerunner, Thomson Semiconducteurs, was asked by French telephone officials to create smartcards for use with pay telephones. The public telephone industry's purpose was chiefly to thwart vandals who damaged coin operated phones.

By 1986, Thomson Semiconducteurs had achieved high volume production of telephone smartcards, and France quickly began replacing coin operated pay telephones with a new card reader format. The disposable cards have been subsequently updated with new features such as 'anti-tearing' protection. The success of phone smartcards led Germany to undertake a similar program in the early 1990s. SGS-THOMSON was again approached to provide the ICs. By this time the company had developed a series of advanced smartcard capabilities, helping to create markets in banking, pay television, and more recently, cellular telephones.

Memory: The Key To The Smartcard
Even with all of the complicated circuitry, a smartcard first and foremost is a data storage device. The heart of the product is non volatile memory, which unlike volatile memory devices such as RAM, retains data even after power to the chip is turned off. This permits the issuer (i.e. bank, phone company) to write information to a card that can then be carried anywhere by consumers. Logic devices and controllers are included with the memory chip to interact with electronic readers. All of these functions are provided on an IC smaller than the fingernail of a newborn, so as to prevent damage to the chip when cards are bent or cracked.

SGS-THOMSON smartcards use Electrically Erasable Programmable Read Only Memory (EEPROM, said 'E squared PROM'), a chip in which the company ranks among the worldwide market leaders. EEPROM is the most advanced non volatile memory yet developed, with the ability to be repeatedly re programmed byte by byte. This critical capability allows issuers to update account information or 'reload' monetary values on smartcards at any time. SGS-THOMSON's EEPROM chips, with a defect rate of only 20 parts per billion and guaranteed performance for one million cycles (e.g., transactions using a card reader), offer the industry's highest quality and performance.

Data Security Measures
Today's smartcard ICs include numerous security features designed to ensure the highest degree of protection for issuers and consumers. More common measures which are used in telephone cards include: transport codes assigned by the chip manufacturer to individual customers (i.e., card issuers) to prevent violation during shipping; the generation on the chip of electronic signatures to validate the IC as an authentic circuit; and 'anti-tearing' devices which safeguard data when a card is prematurely removed from an open reader. SGS-THOMSON's upper end products include 'Memory With Secure MCU,' high density memory complemented by a microcontroller unit (MCU). The MCU can be programmed by the card issuer via software embedded on the chip to perform specific functions known only to the issuer. SGS-THOMSON also offers its proprietary Memory Access Control Matrix, which scrambles the locations of memory cells to confuse and deter hackers. As smartcards evolve and their functions take on added complexity, security has begun to dominate future chip designs. SGS-THOMSON has recently pioneered the embedding of 'crypto-computers' in smartcard ICs. These mini-computers are capable of processing Public Key Algorithms, complex mathematical formulas which protect data through a 'double encryption' process. This process allows the messenger to code a message specifically for the intended recipient, then code it again to mask the sender's identity. The recipient decodes the message using his own key but must decode it again using a key assigned to the sender before it is readable. Thus, the recipient must know the sender's identity before reading the message, enhancing security by providing communicators a method for verifying electronic signatures. Since the double encryption process is time consuming, SGS THOMSON's crypto computers include Mathematical Arithmetic Processors (MAPs) to carry out high speed decoding of encrypted data. Smartcards issued in the U.S. currently cannot offer data encryption technology due to federal law prohibiting the encryption of data by private entities. Data encryption is seen by the U.S. as inhibiting the ability of authorities to monitor terrorism and other criminal activities. Such regulations are not a significant factor in Europe and Asia. Finally, the personal identification mechanism, usually the first security gatekeeper for any card reader, is taking on added importance as the end user market grows. The personal identification number (PIN) is the most common format today but is quickly becoming outmoded. Already, many smartcards feature algorithms permitting literally trillions of possible personal identification sequences. In the future, the industry will move to encoding fingerprints on smartcard chips to further distinguish individuals. SGS-THOMSON engineers have accomplished an even more unlikely feat: encoding the shape of one's retina in a smartcard's memory. The human retina is more distinct than a fingerprint, a fact which should pose substantial challenges to hackers.

Applications
The most immediate smartcard applications are public telephones and banking. Pay-TV and cellular applications are gaining acceptance by service providers in Europe, and more advanced applications are expected to follow suit as consumers become more familiar with smartcards. The annual market growth rate is estimated at about 40% through the end of the century, largely driven by banking applications. The market for phone cards will grow more slowly, its share of the total available market decreasing to about 17% by the end of the century. Currently these cards comprise almost the entire market.

Public telephone systems. Pay telephones are the biggest volume market for smartcards. Throughout France and Germany's major cities, pay phone terminals accept only cards embedded with microchips which store cash values. The first major trial of phone smartcards in the U.S. is now being conducted by US West Inc., which is providing cash cards for use in 16,000 pay phones in 5 states. An added benefit for phone card issuers is the potent al profit from "slippage," any excess value remaining on a card that is thrown away. The amount of slippage in smartcard applications is potentially huge. Analogously , up to 7% of issued travelers checks is never spent.

Personal banking. Banking is a high growth area for smartcards, aided by ATM networks already in place worldwide. The magnetic stripe format used with the common ATM card, however, has only 256 bytes of memory and provides limited security. Smartcards for banking are far more powerful, handling transactions on multiple accounts and allowing cash transfers, enabling consumers to shop with cards. In France, consumers make purchases with smartcards by entering a code into a card reader at the store, much like an American consumer uses an ATM today. With the code verifying the French shopper's identity, nothing needs to be signed. Use of this format in France has resulted in a significantly lower rate of credit card fraud than in other major European nations. In the major banking smartcard trials currently underway in Europe and the U.S., the smartcard serves as an 'electronic purse,' storing cash values which can be reloaded at ATM machines by drawing from checking, savings, credit card accounts and personal credit lines. Such smartcards are aimed at replacing coins and paper currency for low value transactions (typically $10 or less) at venues such as fast food restaurants, bars and newsstands. The cards are also able to record transactions for later printing. Banks and other issuers stand to profit from the 'float' by investing cash values stored on cards but not yet used.

The largest banking smartcard trials are in Belgium and the U.K. Banksys, a consortium of major Belgian banks, began issuing its Proton cards in two Belgian cities early in 1995 and generated over a half million transactions in only six months. Banks in Brazil, the Netherlands, Switzerland, Australia, Hong Kong and New Zealand have already acquired licenses for Proton. In the U.K., National Westminster Bank PLC and Midland Bank PLC have been testing their joint program, Mondex, since the summer of 1995. Mondex is also entering Canada through an agreement with Royal Bank of Canada and Canadian Imperial Bank of Commerce.

In the U.S., leading credit card issuer MasterCard International Inc. has assembled a group of major banks in a nationwide smartcard network called 'SmartCash.' The MasterCard group includes BankAmerica Corp. and Chemical Bank ng Corp., as well as French smartcard manufacturer GemPlus SCA and Verifone Inc., an American company which manufacturers electronic transfer verification devices.

Pay TV. Pay television service operators experience significant fraud due to the difficulty of controlling access to satellite transmissions. Smartcards which enable the decoding of scrambled television programming are now undergoing trials in this market, enabling consumers to order televised events on account and preventing unauthorized interception of signals.

Cellular telephone service. Cellular phones are expected to be a major market for smartcards, but it is only now beginning to develop for two reasons. First is the adoption of the GSM phone design standard by Europe and 80 other countries, which allows chip designers to address the needs of a uniform market. Secondly, cellular phone smartcards require substantial memory and must operate with limited power. SGS-THOMSON has been the first Smartcard IC maker to address the needs of this market, offering a low power 8 kilobyte EEPROM chip with a secure microcontroller unit, fully operating in the entire 2.7-5.5V range. This IC is the most powerful smartcard memory product available today. A 16kbytes EEPROM chip in 0.7um technology will be available by the second quarter of 1997.

Health cards. By storing individual medical records on smartcards, governments or in the case of the U.S., HMOs and other managed care organizations can provide quick, accurate treatment services while streamlining the payment and reimbursement of physicians and other health card providers. This application has been started in a first simple approach in Germany and will be started in a much more complex approach, requiring a high security level, in France in 1997.

Transportation. Several elactronic ticketing applications are now emerging, requiring the utilization of contactless communication between the card and the terminal, in order to reduce the overall transaction time. MCU-based hybrid cards are likely to become the preferred choice, allowing the double function of electronic purse (contact) and electronic ticketing (contactless). A monolithic secure product suitable for contactless and hybrid applications will be available by the second quarter of 1997: the ST16RF42, merging the functionality of ST16SF42 (2kbytes EEPROM) and the RF interface.

Looking To The Future
Smartcard designers are increasing transaction speed even further by minimizing card contact with card readers. Smartcards currently feature five or six d dcontactdd points which respond to card readers much like nerve endings react to touch. However, 'contactless' cards are already being perfected, enabling data to be read from a distance, such as by radio frequency transmission. Contactless cards will be part cularly useful in transportation, where cards can be waved at readers as drivers pass through toll gates, or as commuters hurry through a subway turnstile. Anticipating a consumer marketplace featuring a wide variety of smartcard applications, manufacturers are experimenting with multi application cards. Eventually, the industry will likely settle upon one smartcard for all applications. Known as 'open application' cards, these smartcards will contain software libraries to allow for programming by multiple service providers. The total cost of issuing a smartcard, including chip and plastic card manufacturing and programming by the card issuer, can be as high as $40 per card. It is likely this cost can be cut to 5% of that figure, or to $2 per card, by the end of the century. Driving the cost savings will be the increased use of embedded software for programming and user specific keys for enhanced security, both of which will reduce the hardwired logic content now utilized in most smartcards.

February 1997

SGS-THOMSON Smartcard Products Division
Maurizio Felici, General Manager
Jean Paul Thomasson, Marketing Manager

SGS-THOMSON Corporate Communications
Carlo Ottaviani, Vice President
Maria Grazia Prestini, Corporate Press Relations Manager

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