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Smart Card Makers Struggle

It's been a rough year for companies that make smart cards, but a new Frost & Sullivan report says sales may start to pick up soon.
Aug 05, 2002Aug. 5, 2002 -- It's been a rough year for companies that make smart cards. Demand for subscriber identity modules (SIM cards) fell off sharply as growth in the cell phone market slowed. That forced smart card makers to slash prices, which hurt profits.

But the industry may not have to wait to long for a turnaround. Changes in fraud liability regulations, the increasing popularity of stored value cards and a growing awareness of the need for better security should drive demand. Frost & Sullivan, an international marketing consulting company based in San San Antonio, Texas, forecasts unit shipments to rise to 2.4 billion in 2004, from 1.9 billion this year, according to a new report.

Gemplus remains the largest smart card company, despite having its problems. It had 33.6 percent of the market in 2001, according to Frost. That was slightly ahead of SchlumbergerSema, which had 33.3 percent. In revenue terms, Gemplus had 27.8 percent of the market and SchlumbergerSema had 23.8 percent.

The market for SIM cards is expected to remain soft for the rest of the year. Companies will continue to grapple with oversupply, which will put pressure on prices. But other markets may soon pick up some of the slack. Security is one that might play a bigger role, as governments and businesses respond to the threat of terrorism.

"Proper and secure identification is being viewed as critical especially in the government sector," says Anoop Ubhey (pictured), Frost's smart card analyst and the author of the report. "As a result, tremendous interest has been generated to use smart cards as a secure form of identification whether for the employees or the populace at large."

Security uses could be the thin edge of the wedge. Governments are eager to implement more secure personal identification systems to improve confidence in verifying the identity of individuals seeking access to physical or virtual locations. Governments are testing smart cards for national identification, driver's licenses, military security, and social services. In many cases, governments are also seeing benefits from adding other uses to the cards.

"Governments find additional benefits when multi-application platform smart cards combine services like retirement benefits, e-purse, phone card, and so on," says Ubhey. "E-government projects and pilots to provide easy and customized services to citizens online have been on the upswing in Asia and Europe."

The three big payment associations, Europay, MasterCard, and Visa, have spurred migration to smart cards by establishing timelines under which liability for fraudulent transactions will shift to banks, if they haven't implemented smart credit cards and it can be shown that a chip card would have prevented the fraud.

Visa Europe aims to convert 37 percent of its credit cards to smart cards by end of 2002. But the economic slowdown could slow its progress, according to Ubhey. "Still, the migration of magnetic stripe cards to smart cards is active all over the world and will uplift the slow smart card market," he says.

And finally, Frost says Java cards are catching on in the SIM, network security, banking and ID markets. Sun Microsystems released Java version 2.2 in the second quarter to enhance the industry's open and secure standard for multi-application smart cards. The release features new technologies that make it easier to program Java Card applications and improve interoperability of applications on smart cards from different vendors.
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