Smart card and the effects of smart cards on current card business

Abstract

The first part of the thesis gives a background of the current conventional credit card business, which heavily depends on the magnetic stripe technology. It starts with a brief definition of credit cards, which is followed by the history of credit cards both in the international market and in The Turkish market. Credit cards are designed to satisfy payment purposes and replace cash or checks. The first application of credit cards started at the end of the 19'th century in the United States. But these primitive applications were limited to certain areas or purposes. The understanding of modern credit card usage was first attempted in America in 1950. The development of credit cards was much slower in Europe. France was the first country to introduce modern credit cards to Europe in 1960. In Turkey 2Setur A.Ş.3 was the company to issue the first credit card (Diners Club International) in 1968. With the establishment of Bankalararası Kart Merkezi (BKM) in 1990, card transactions have gained enormous speed and efficiency. Since credit cards are the perfect substitutes for cash, they are effective in the national economy, which is dicussed in the 3rd section of the first part. Credit cards increase the supply of money, and as long as the rise in the money supply is supported by an increase in the production level, the national income will also rise. Otherwise there will no doubt to be inflationary effects in the market. The credit card industry in Turkey today employs more than 10,000 people. Technological developments in the card business will result in shifts in skill levels of personnel, but not in replacement of labor by capital. There is a myth that credit cards can influence the level of interest rates in the market although there are no proven cases. The use of credit cards will increase the public income, since tax evasion is not possible. Both foreign trade and domestic trade will be effected positively by the wide use of credit cards, but the net budget deficit depend on the volumes of foreign spending and the domestic spending by foreigners. After the discussion of plastic card types, which includes magnetic stripe technology, the parties that interact with each other in the system, the operation of conventional credit card systems, the security matters with traditional magnetic stripe credit cards and finally marketing issues of conventional credit cards will be discussed respectively. Credit cards and the card technology are designed to meet payment purposes for the exchange of goods and services. According to the ways they operate and are designed, there are many forms of payment cards. For a smooth, safe and proper operation of a payment card business, different parties interact with each other in the market, such as card associations, financial institutions, merchants, cardholders and non-profit organizations to support the transactions between the financial institutions. Communication between those parties to enable safety is essential in the payment card business. Telephone lines are the best communication source in magnetic stripe card technology. There are many concerns, however, the security and protection of personal information in the card business is one of the most important issues. The evolution of conventional credit cards in the last 20 years has faced many fraudulent activities and types. Today, specialists are well aware of those types and have developed many security features to disable them. But fraud also follows a typical product life cycle, -- meaning that every new security issue is followed by the new fraud methods, increasing the losses after a while. The things that can be done for magnetic stripe technology has reached a plateau, putting the card issuers, associations and especially the cardholders in a risk of increased losses. Card issuers, the key players in the payment card business, have been facing severe competition in the market today. For the survival of their business and to maximize profits, achieving customer loyalty has become an important goal, since customers have become more mobile and better informed. Today almost every marketing department in the card business focuses on increasing the loyalty of existing cardholders and attracting new customers through new series and products. The second part of the thesis focuses on the chip cards, also known as smart cards, which are believed to be the future of all plastic card business today. A detailed definition and the development of smart cards throughout their history is given in the first section of the second part. Smart cards are chip-embedded plastic cards; in other words, they are plastic cards with a higher computing, higher data storage and processing ability. They are capable of satisfying multi-purpose applications. Due to the capabilities and the technology they use, advanced security features can be added. They are more than just a secure magnetic stripe credit card. The progress micro-electronics and semiconductor technology in the 1970's made it possible to integrate data storage and arithmetic logic onto a chip, which is only a few square millimeters. The idea of incorporating and integrated circuit into an ID card in 1968 by a German scientist was the first idea of smart cards. In 1982, smart cards were transferred to the credit card business by French BankCards Group on a trial basis. The biggest breakthrough for common public use was achieved by the French Postal an Telecom Services in 1984. The technical specifications and standardization, which is discussed in the second section, is a vital issue for smart cards. Realizing the powers and capabilities of smart cards to achieve worldwide interoperability, International Organization of Standards has been developing common standards for chip technology. And in a partnership with major card associations, EMV standards have been developed for smart cards for the use of chip cards payment purposes. The section also includes the types of chip cards. Chip cards can be classified into two major groups; memory cards and microprocessor cards. Today the commonly used ones are the memory cards, which have the ability to store any given information. The next generation chip cards will be microprocessor cards, which are able to process given data, rather than only storing it. The wide application areas of chip cards for various industries described in section three are followed by the operation, security issues and marketing of smart cards. The advantages of a high and secure storage capacity and the execution of cryptographic algorithms associated with microprocessor cards permit a wide range of new applications beyond that of the familiar payment cards. Smart cards have the ability to support not only the telecommunications, mobile communication, financial health and mass transit industries, but also customer loyalty and various payment programs. The need for on-line infrastructure in magnetic stripe technology is not a requirement for secure transactions in smart card technology. The chip technology not only enables secure storage of personal data and protection from unauthorized access, but also offers additional security features due to their-- capabilities. Such off-line transactions will save the card and service providers from fraudulent activities and authorization costs of current online infrastructure. Future predictions forecast that fraud levels will increase in the current magnetic stripe technology. The current use of smart card technology in some European countries shows that fraud levels have declined sharply since the migration to chip. Smart cards include certain characteristics that will stimulate the market. But first both the domestic and international interoperability must be established. Since it is a radical change, slow and careful migration using pilot programs is essential. The current developments and reports prepared today prove that smart cards themselves will not only be an incentive for consumers to use but also they will create many advantages such as access to better customer data and effective processing encouraging companies to adopt chip technology. Part three basically compares the smart cards with the magnetic stripe conventional credit cards from in terms of application areas, operational systems, security issues and marketing points of view. The superior power of smart technology over magnetic stripe technology will also be proposed and discussed at length. The final section of part three discusses the future and expected developments in smart card applications and possible concerns. But primarily, the current and actualized developments and cases are explained both within Turkey and the international arena to construct a strong base for the future expectations. Despite the advantages of smart cards, their present emergence has been restricted mainly because of price and infrastructure. But the success of current developments, the declining cost of technology, the fear of being left behind the market improvements, and satisfying the increased customer demands will force the market to slowly migrate toward chip technology. The multi-application of smart cards will cause the companies initially to interact with each other as through partnerships, mergers and acquisitions. In the future, companies from different sectors are likely to interact each other, such as GSM companies competing with banks in the financial sector. To supply the most efficient use of smart cards, new products and their infrastructure, is also likely to develop in the future. Dual-chip cellular phones, interactive digital TV, smart card readers for e-commerce are some of the examples of such devices. Of course, there are few concerns of government and monetary authorities about the control of the money supply and monetary policies, which have to be resolved, since e-purse, a service made possible by smart cards, can limit the use and print of physical money.