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Popular Smart Card Tutorial By Dr. David Everett
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By Nick Holland, Director of Emerging Technology Research, Mercator Advisory Group

The Japanese have long caused feelings of 'gadget-envy' in me, coming up with inventions that we didn't know we needed until they appeared on our shores and then can't live without. Think of the walkman, the VCR, the digital camera. It's always seemed to me though that we get the clunky models designed for big fingers and they keep the truly beautiful examples of the synthesis of art and technology for themselves.

And the current Japanese cellphone is a classic example of this; a compact, sleek device with an interface offering true wireless internet, secure banking, contactless payments and biometric activation. The word 'cellphone' doesn't do the device justice; it has morphed into a personal payment terminal, a PDA and then some. Sadly I live in the US, a country just awakening to the 'cutting edge' potential offered by GSM, SMS and SIMs.

So how did the Japanese develop to where they are and what would it take for the US to get there?

Quite simply, the Japanese payment system took a divergent evolutionary path to the one we are familiar with in the states. Japan has been slow to make the transition to consumer credit. In fact, credit cards were barred from issue by Japanese banks until 1982, and it wasn't until 1992 that these could facilitate revolving credit. To fill the gap, different models developed for credit payment, such as 'Ikkai Barai', a system not dissimilar to charge cards in the US.

There is debate as to whether the late adoption of revolving consumer credit led to the present differences between American and Japanese payment systems, or whether there a more fundamental cultural difference with the comfort level for personal debt per region. Either way the net effect is the same - Japanese consumers are less comfortable with credit than regions such as Europe and North America

Japan had also very different structural foundations for a payment system to those in the US. Real-time authentication of a cardholder requires access to cheap telecommunications networks and in the US this has been a luxury we've had for many years. For Japan, the opposite is true - they've been hamstrung by one of the most expensive telecommunication networks in the world. To work round this, payment systems have developed in Japan that allow for authentication without the requirement for telecommunications using Smart Cards. And with Smart Cards come not only the potential for offline authentication, but also for stored value, multiple applications in a single environment, contactless payments and the ability to do away with a card form factor altogether.

The cost of telecommunications also had implications for the development of the Internet and e-commerce. Japan's route to Internet adoption wasn't via the PC as in the US, but through cellphones offering the NTT DoCoMo iMode service. From the outset, the Japanese cellular system was designed to carry data as well as voice and their handsets have evolved accordingly to facilitate not just conversations but web browsing and m-commerce. Conversely, only in the last couple of years have US cellphone carriers made the shift towards data-centric handsets and networks. True, US networks are evolving fast, but there's still a long way to go.

The flipside to Japan's evolutionary path towards Smart Cards and cellphones is seen in the US. Cheap telecommunications meant growth in PC based Internet services and no real reason to evolve away from magnetic stripe cards. If card fraud can be kept at a tolerable level by real-time authentication, then there really isn't a compelling reason to shift to chip based authentication. If it works, don't fix it. And that's exactly what's happened. The problem arises when we take a peak through the looking glass… we've glimpsed a parallel universe and ours looks primitive by comparison. Smart Cards and high powered handsets have opened up a world of possibilities for Japanese consumers that we are far from realising.

Phenomenally successful programs such as the Octopus Card in Hong Kong (based on the Japanese Sony FeliCa card) and the aforementioned iMode have not missed our attention. So what would it take to develop a system comparable to the JCB / NTT DoCoMo handset in the US, one that allows for POS payment and wireless reloading direct from your bank account?

• Contactless cards are going to be plain magnetic stripe substitutes to start with, but may well be the back door to more powerful Smart Cards in the US once economies of scale come into play and the benefits of added security and multiple applications on a single card become realisable. MasterCard's PayPass contactless card which is being launched this summer might be the start of the process of weaning us off the mag stripe and once this is done, we can consider alternative form factors for POS payments including cellphones.

• Should contactless catch light in the US (and there's every indication that it will), then the cellphone would be the logical resting place for the chip given the way that the cellphone has crept into our lives. Cellphone manufacturers such as Nokia and Motorola are already developing handsets with chips operating on the standard for contactless POS payments in the US; ISO 14443. In the case of GSM cellphones, there is already a Smart Card in the handset; the SIM card - it's not a great imaginary leap to consider bank issued Smart Cards SIM cards that could be inserted into phones.

• Carriers in the US are shifting to GSM as a common platform and from this there are development paths via GPRS and EDGE to squeeze the most out of current networks. This gets us to maximum data transfer speeds of around 400Kbps, which would probably be good enough for handheld web applications and the necessary security algorithms.

So within the next few years we'll be able to discard our wallets in favor of a cellphone. Maybe. And the Japanese will be how far ahead by then? The grass is always greener, that's for sure. Who knows, perhaps there are neo-luddites in Japan who are tired of the next big thing and quietly pining for retro-chic in the form of magnetic stripe cards. If any are reading this, I'd be happy to do an exchange visit.