the term paper

The History Of Smart-Cards

and Their Place In Modern Russia

Contents

TOC \o «1-3» Introduction PAGEREF _Toc482676025 \h 2

What are plastic cards? What kinds of cards exist? PAGEREF
_Toc482676026 \h 2

Cards with magnetic line and memory-cards PAGEREF _Toc482676027 \h 2

Smart-cards: step forward PAGEREF _Toc482676028 \h 4

The developing of smart technology PAGEREF _Toc482676029 \h 5

Smart-cards appear in Russia PAGEREF _Toc482676030 \h 7

Smart-cards as bank’s cards PAGEREF _Toc482676031 \h 7

Smart-cards as corporate cards PAGEREF _Toc482676032 \h 8

The place of smart-cards in modern Russia PAGEREF _Toc482676033 \h 12

Plastic card payments in Internet PAGEREF _Toc482676034 \h 14

Conclusion PAGEREF _Toc482676035 \h 15

Sources and literature PAGEREF _Toc482676036 \h 16

Introduction

Russian smart-cards market is one of the fastest developing sectors of
country’s financial market. The trial period which was over by 1995
allowed its participants to learn technologies and problems that can be
hit upon while dealing with “cards” business. The fact that more then
500.000 international plastic cards were issued in Russia for several
last years only approves of the topicality of such payment systems.

What are plastic cards? What kinds of cards exist?

Cards with magnetic line and memory-cards

Cashless payment systems based on traditional cards with magnetic line
are dominating world wide. They achieved noticeable improvement in
supplying card owners with many kinds of services. But the fact of
internal limits in magnetic line cards leads to many new problems. These
problems are: the increase of financial risks and losses, administration
expenses, technical problems. This kind of cards has a lot of
disadvantages that make their operation in Russia in same scale as in
Europe impossible. The most serious disadvantage, in my opinion, is that
such systems require on-line authorization in stores and, as a
consequence, they need well branched high quality communication nets
(e.g. telephone lines).Because of this fact magnetic line cards systems
have a serious restriction for their operation in the countries with
unsatisfactory state of telecommunication systems. I also have to notice
a low security level of magnetic line cards and the entire technological
chain of such systems. This often leads to great flow of unprovided
false transactions. This aspect is a serious obstacle to developing
magnetic card systems, especially in the countries with a high level of
criminality.

Memory-cards belong to chip-cards equipped with memory chip. Payment
systems based on memory cards have important advantages as compared with
magnetic line cards. They have a higher security level and the option of
off-line authorization in stores. Technical abilities of chip built in
memory cards define restrictions to their operating in payment systems
though. We have just the same problem here (as with magnetic line cards)
– unsatisfactory security level of any single card and system in
general. Taking criminal situation in Russia into consideration we have
to admit that this kind of cards can hardly find the appropriate place
in modern Russia. This aspect captures a special place when several
banks are involved in one payment system, where special attention should
be paid to accident prevention and authenticity of financial
information, differentiation of responsibility for keeping a secret
information with transaction members. Main areas for memory-cards are
systems of limited access to accommodation and computer networks
(identification cards); telephone networks (cellular telephone network
GSM); payphone and metro cards, local payment systems (club cards).
Certainly, memory-cards will find their place, but obviously they will
not be ruling in future.

Thus, magnetic line is a medium in magnetic line cards which lowers
reliability and makes multi recording impossible and requires on-line
access.

The chip is a medium in memory-cards. Such cards can be used with
off-line access, multi recording is available, but the procedure is
still complex. Because of low security level running memory-cards is
dangerous.

Smart-cards: step forward

Magnetic line cards market is now formed in all developed countries.
Giant infrastructure was created: processing centers, money access
machine, trade terminals, hundreds million cards in use, international
standards are formed and admitted. That is why magnetic line cards will
be still in use for many years.

However, world leaders VISA, Europay, MasterCard have already declared
about inevitable conversion to smart-card technology in future. All of
them started developing future international standards for payment
systems based on smart-cards. Even in Europe where magnetic line cards
are traditionally popular smart-cards are winning one project after
another.

The most successful introduction of smart-cards is supposed to take
place in the countries where magnetic cards hold a weak position; in the
countries without high quality well branched and reliable communication
systems; in the countries with a high criminal level where the
population have a low credit reliability.

These days many Russian banks issue traditional magnetic cards of
international payment systems. However, such issues are definitely
oriented on concrete social consumer group and regions of their use are
quite limited.

Now lets say some words about a smart-card. The medium in smart-cards is
a small processor chip. The identification area allows only one record
while personalizing the card and later available for reading only.
Access to other areas available only after the card holder entered the
proper “key”. The smart-cards security level is much higher than the
magnetic cards one. As to prices on smart-cards, they are higher, but
they become lower and lower every year as their technology is being
improved and production scale is being enlarged

The smart-cards are small computers is some way. Modern smart-card
chips features can be compared with personal computers in early 80’s.
Part of the data located on a smart-card can be used only in internal
card’s operations. This fact together with high level cryptographic
security makes smart-cards valuable asset for financial systems
demanding additional security and reliability. Because of that
smart-cards are now considered to be the most promising kind of plastic
cards. They can be also considered to be the most promising for their
features. Smart-cards counting abilities allow card holder to keep
multi-currency wallet. As predicted by VISA and Europay/MasterCard,
smart-cards will replace magnetic line cards within the 10 year period.

The developing of smart technology

First smart-cards appeared in France in the middle 70’s. The main
advantages as compared to magnetic line cards are higher reliability,
security and multifunctionality. The main disadvantage that it is still
difficult to get over is high prime cost.

Nevertheless, in early 90’s rapid growth of smart-cards market took
place. Thus, at the last smart-technology forum (SmartCard Forum),
hosted in the USA, statistical reports showed that the majority of
magnetic line cards owner would use smart-cards as electronic wallet if
their bank issued such cards.

But financial institutes that working with smart-cards have a lot of
questions at the moment. Many of these questions still do not have
answers. Here are the most popular ones:

How high is the level of smart-cards security?

What schemes should be used for transactions: open or secured?

How available and reasonable is the complete replacement of cash with
electronic money?

What authorization mode is better: on-line or off-line?

The fact of existence of these questions demonstrates that there is a
high interest in smart-cards connected with an ability to transform
little sum payments into cashless payments. Visa researches show that
annually more then 1,8 trillion dollars happen to less then 10 dollars
transaction. Obviously operation of these payment through electronic
cards is more than attractive. But the organization of such
transformation hits upon serious problems even in well developed
countries. In this case solving this problem with a help of electronic
wallets seems to be the most effective. According to Jean Jacques
Debone, the president of European branch of Visa International “the
development of smart-cards, allowing the client to make less then 8
dollar payments, will treble bank’s cards profit”

Smart-cards appear in Russia

Smart-cards as bank’s cards

BGS Smartcard Systems AG is the official dealer and distributor of Visa
International smart-technologies is Russian and the former USSR market.
It was founded in 1997 and holds right for software and technologies of
cashless payments based on U.E.P.S standards. U.E.P.S. – universal
electronic payment system is a system based on smart-card technology.
The main technological feature of U.E.P.S. is that all transaction
operations are done in off-line mode trough direct contact of two
smart-cards. BGS introduced several large projects for Sberbank of
Russia, Promstroybank, Inkombank and some other banks and bank’ unions
in Russia, the leading banks of Uzbekistan, Ukraine and Kazakhstan. In
September 1996 BGS signed the agreement with Visa International on
developing and migration of smart-card product COPAC including U.E.P.S.
as a basis. The matter for greater interest is joint project with
Sberbank on creating the united smart-card system (SberCard cards).
Taking scale of spreading and recent issue date into consideration we
can say that SberCard is on of the most promising card in Russia.

On Sep 13 1996 during annual meeting of banks-members of international
payment system VISA International announced a new product – a new
plastic card with microprocessor Chip Off-line Preauthorized Card. This
product has no special brand name yet, abbreviation COPAC was taken as a
working version of a brand name.

Since 1992 BGS company has exclusive right for distribution U.E.P.S
technology in the former USSR, Western Europe and Austria.

VISA International declared in the second quarter of 1997 of the new
pilot project with Sberbank of the Russian Federation and Inkombank
(Union Card) on introducing COPAC technology. After this the pilot
project was over new COPAC specification became

available world wide.

Smart-cards as corporate cards

The greatest company offering corporate integrates smart-cards systems
in Russia is IT company. Founded in 1990 today Information Technologies
Co. (I.T. Co.) ranks among the top three Systems Integrators in Russia,
according to the Dator marketing agency and Russian Computer Union
opinion poll statistics. Reporting annual revenues in excess of $27
Million, I.T. Co. has deployed over 500 projects in Russia and the CIS
for industrial enterprises, trade companies, government, and financial
institutions. In 1996, Computer Press magazine granted I.T. Co. an award
“For Outstanding Results in Developing the Russian Computer Market”, and
was included into the State Registry of Quality Systems. Having
extensive experience in the development of information and computing
systems, I.T. Co. has created a broad product line of private-branded
high-tech software and hardware solutions for the local and
international market. Since 1990, I.T.Co. has focused on meeting the
demands of what is now today’s competitive global marketplace. As
businesses, large and small, progressively long for ways to interface
with all of their suppliers using one system — a complete information
management system that is specifically designed with the customers’
needs in mind, and just as importantly, a system friendly to the bottom
line — I.T.Co. remains on the forefront of technology, delivering a
quality product on time, and on budget

I.T. company has developed their own conception of smart-card systems
CmartCity. Besides SmartCity technology department proceeds developing
and promotion of new systems of controlling and managing banking
accounts through Internet. This project is based on the client-server
software on personal finance managing DEKART, a new solution in
electronic commerce area.

SmartCity is a “card” product of I.T. The company together with its
suppliers created several large-scaled projects based on this system.

I would like to stress three projects of this company in Russia.

One. Cashless payment system “Meta Card” based on SmartCity technology
for Metkombank, Cherepovetz. System projected “power” is 50.000 cards,
with 300 trade terminals. This number covers 75% of town’s stores and
trade points and services. The card holder can use his card not even in
Cherepovetz but in Metkombank affiliates in Vologda too.

Two. Cashless payment system for gas filling station “LICard” also
SmartCity product. This system was created for oil company Lukoil and
Imperial Bank in Volgograd, Perm, Vologda, Cheliabinsk and Baku for
100.000 cards. Further developing of the project provides organization
of cashless payment for Lukoil gas station on entire territory on
Russia with 300.000 cards issued by 2003.

Three. Cashless payment system for Purneftegas in Gubkinsky in Tumen
region. This project provides 31.000 cards. More then 100 terminals were
installed to deal with smart-cards in food, bakery stores, airline
booking offices. All in all in 50 trading and servicing places in
Gubkinsky.

Lets take a proper look at “LICard” project. In my opinion, it is the
most promising one.

Lukoil corporation has big and constantly growing number of filling
stations in all regions of Russia and many countries of the former USSR.
The company plans not only further grown of number of gas stations but
also widening the specter of provided services including cashless
payments by plastic cards.

While creating corporate electronic payment system on company’s filling
stations and terminals the following aims were pointed out:

Increase of financial arrivals to Lukoil;

Creating of information database for making managing decisions;

Exploring new sales markets.

Lukoil fuel cards are used in several regions (Volgograd, Chelyabinsk,
Perm and others) for years. In every separate region cards functionate
well. But the problem of unite system was not solved yet. The card
holder cannot use his card in another region but only where he has
bought his card. That’s why the question of unification of the system of
electronic payments appeared where cards could be acceptable at every
filling station.

The main criterion while choosing the technology for organizing cashless
payments was the low level of telecommunication systems in Russia, which
makes on-line transaction almost impossible. Thus, it was decided to use
smart-cards to operate the special processing center instead of on-line
transactions (off-line). The second argument for smart-cards was high
security level of recorded on smart-card information. Besides,
smart-cards are available for many kinds of application which was also
important for this project.

It was decided to use smart-cards produced by GemPlus company in
SmartCity technology for creating corporate electronic payment system
for Lukoil filling station. Every person or company can become a card
owner.

Before going somewhere a car driver put his money on his smart-card or
money can be transferred by an organization. And now our driver travels
with a plastic card instead or a huge wallet full of money for his trip.
When filling at Lukoil gas station corresponding sum of money is written
off from his smart-card. If using smart-card driver gets 3-7% discount.

By the end of 1997 LICard system has been in action in greater part of
Russia. Noticeable growth of personal LICard owners was hit upon for the
recent year.

LICard has three levels the scale of ranks as to its organization:

Low level. Regional agencies and service offices, and filling stations
Lukoil;

Middle level. Regional processing centers and regional representative
offices of LICard;

High level. Application center and interregional processing center
LICard.

Transfers between regional centers are carried out through the
interregional processing center. This action allows any filling station
to receive money even if no money was put on the card.

This project can real working example of applying smart-cards for
corporate needs. But I would like to notice that not all features were
used in this project. Using some additional wallets project owner could
have more effective and profitable system.

The place of smart-cards in modern Russia

In this chapter I mean smart-cards under “plastic cards” term. Because
magnetic line cards and memory cards have little chance for success in
Russia.

Our plastic cards market is rather a collage picture. Before 90’s
plastic cards was so badly known that they even were not shown in Soviet
films that showed disadvantages of Western style of living. Meanwhile,
plastic cards are so deeply integrated in American and Western style of
living that person who has rather big sum of money is cash almost
immediately gains the reputation of a criminal.

Plastic cards are not so wide spread in Russia as in Europe and of
course in the United States. Obviously, the reason is in the lack of
necessity of everyday cashless payments We also have to take average
income in our country into consideration which, unfortunately does not
let many citizens to have enough free money to place then on a card.
There are still many obstacles in operating plastic cards in Russia:
from simple tradition to call pieces of paper in a pocket money to
elementary distrust, fear to become a victim of another “MMM”
speculation project.

Hence placing plastic card into operation in further 3-5 year would not
bring a satisfactory result to any bank, no matter how reliable it is.
The success can be reached only by uniting all existing systems into one
national payment system. But this perspective is now very attractive to
the majority of banks as they are afraid to depend on bigger and
stronger banking groups. Beside that the present level of
telecommunication systems and banking equipment will not let such
project to be realized. And great investments are needed for many banks
to proceed the convertion from magnetic line cards to smart-cards.
That’s why I consider putting smart-cards into operation in Russia
rather disappointing in the nearest years.

I think the solution of this problem is in replacing existing systems of
cashless payments with smart-cards technology. Lets take transport fuel
coupons as an example. Obviously, introducing plastic cards in this
sphere will meet the lowest resistance of citizens who got accustomed to
other kinds of cashless payment for fuel. Such systems are good for
both: people and oil companies. People are glad to carry one small card
instead of a bunch of coupons and to be sure that nobody else would use
their fuel credit even if their card is stolen. Oil companies gets
valuable assets with such systems as they ensure themselves from serious
losses connected with coupon falsification. And if we mention speeding
up money return, it becomes absolutely clear that such systems will soon
appear in our life. After fuel smart cards are introduced, additional
wallets can be added to the same cards. For example, on one and the same
card fuel credits can be recorded (in litres), some technical service
for cliens car (in working hours), dinners in filling station cafe (in
number of dinners). It that situation our driver can travel with a
little sum in cash and his smart-card.

Besides, using plastic cards instead of coupons territory depending
problem can be easily solved, as direct and strong “coupon” connections
already exists through oil companies.

Thus, in my opinion, the process of introduction plastic cards should
start not from banking but from trading sphere. The ideal case could be
the combination of corporate, banking and international cards into one.

Plastic card payments in Internet

Another stimulus for developing smart-cards is active growth of selling
trough international computer network Internet. Unfortunately it has not
received enough development in Russia. Although there are companies
selling goods through Internet (music CD, books, computer) payments are
still processed after an old manner: client pays the money after he gets
the good at the post office. Hence there are some noticeable losses
because of payment delays.

The situation in Europe and the United States is quite different.
Companies sell almost everything from pens to cars and cottages through
Internet and such activities give real profit. For example, on 10 May
1999 Apple virtual computer store sold equipment on more than 1.9
million dollars – a record during short history on Internet selling.

In trading part of the Internet the decision to converse from magnetic
line cards to smart-cards has been discussed for more then 3 years. As
e-companies incur constant losses because of low security level of
magnetic line cards If such decision is made we will have the right to
say that it will be a final victory of smart-cards over their out of
date congeners.

Conclusion

The above analysis of operating smart-cards as modern international
payment tools allows me to make the following conclusions:

Impressing results are reached in realization of smart-technology and
applying different kinds of plastic cards payment systems in
international markets.

The process of developing plastic cards as universal payment systems is
in a phase of rapid growth in Russia

There is a clear tendency of intellectualization of plastic cards,
based on modern technology chip equipment and electronic communications.

Year 2000 will define tendencies of plastic cards developing once and
for all.

The most promising way of introducing smart-cards in big Russian cities
is in creating local systems of small sum cashless payments with their
further unification into one national cashless payment system.

Sources and literature

Mike Hendry. Smart Card Security and Applications (Artech House
Telecommunications Library). Artech House. September 1997

Catherine A. Allen. Smart Cards : Seizing Strategic Business
Opportunities : The Smart Card Forum. Irwin Professional Pub. November
1996

Jose Luis Zoreda. Smart Cards. Artech House. December 1994

Ron E. Gielgun. 1 Business, 2 Approaches : How to Succeed in Internet
Business by Employing Real-World Strategies. Actium Publishing.
September 1998

Bruce J. McLaren, Constance H. McLaren. E- Commerce : Business on the
Internet (Computer Applications Series). South-Western Pub. June 1999

Other sources:

WWW-server of Visa Internetional http://www.visa.com

WWW-server of MasterCard International. http://www.mastercard.com

WWW-server of BGS Smartcard Systems AG. http://www.bgs.ru

WWW-server of company «I.T.» http://www.it.ru

Special thanks:

Erik Przekof. Consumer Credit Counseling Services. Farmington Hills, MI,
USA

Tyra Turnquest. CCCS of the Gulf Coast & Money Management International.
Houston, TX, USA

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