Financial companies have failed to popularise so-called smart cards in the United States, but the new effort is different in several ways, which could mean success this time. With the backing of American Express and Visa International in combination with three major card issuers, millions of the cards are expected to enter circulation this year.
And with each card that's issued, Sun Microsystems makes a little bit of money as a royalty for its Java software, used to run the software on the tiny computer inside the card.
Also backing the smart-card push is Compaq, which announced Monday that its home computers will come with smart-card readers, making the cards useful for purchases over the Web. Other PC makers are expected to follow suit.
Sun President Ed Zander said at his company's JavaOne conference Monday that Sun spends hundreds of millions of dollars researching Java, but the software technology still is "an investment"--implying that the revenue from using Java on smart cards, mobile phones and servers doesn't make a profit.
If Sun makes just 10 cents a credit card, that would mean US$700,000 in revenue for the 7 million Java smart cards Visa expects to issue by the end of this year--not trivial, but a fraction of the roughly $4 billion the company expects to make this quarter.
While millions of smart cards will be shipped into the US market, a card by itself is useless. "We are definitely creating a critical mass of cards," said Patrick Gauthier, senior vice president of smart-card applications at Visa. However, "a smart card is like a TV remote control: It's a great tool, but you still need a TV to make it useful."
Gauthier argues that another essential ingredient for success--readers and uses for the new cards--are on the way. Improvements to security and convenience will appeal to customers, while stores will favour the technology to offer incentives to keep customers, Gauthier said.
Rougher climate
The change comes at a critical time for the credit card industry. Financial institutions have been accustomed to profits from their credit card groups, but that is likely to change.
"We anticipate a more difficult operating environment for the industry during the 2001-2002 timeframe, reflecting escalating credit card losses and slower revolving consumer debt growth as higher unemployment works its way through the economy," ABN AMRO analyst Andrew Collins said in a report last week.
Java-based smart cards aren't for everyone. Many of Visa's 42 million smart cards in circulation worldwide use other software, though Visa backs Java cards for countries with widespread Internet access because of Java's ubiquity in the online world.
One key reason smart cards may finally catch on is diminishing costs. In the past, each cost $5 or $6 to issue, but anticipated higher sales let Visa introduce a new model that costs the issuer only $2.89.
That's still a lot more expensive than the 30 cents to 50 cents a magnetic-stripe card costs, Gauthier acknowledged, but the price drop was enough to change banks' attitudes from "Why bother?" to "Why not?"
Sun isn't the only one that stands to gain. IBM actually wrote the Visa smart card's "virtual machine"--the crucial code that lets Java software run on Visa's smart-card chip.
