The history of smart-cards and their place in modern Russia
St.Petersburg State University
Faculty Of Economics
the term paper
The History Of Smart-Cards and Their Place In Modern Russia
author: Victor Travin
Contents
Introduction 2
What are plastic cards? What kinds of cards exist? 2
Cards with magnetic line and memory-cards 2
Smart-cards: step forward 4
The developing of smart technology 5
Smart-cards appear in Russia 7
Smart-cards as bank’s cards 7
Smart-cards as corporate cards 8
The place of smart-cards in modern Russia 12
Plastic card payments in Internet 14
Conclusion 15
Sources and literature 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:
V How high is the level of smart-cards security?
V What schemes should be used for transactions: open or secured?
V How available and reasonable is the complete replacement of cash with
electronic money?
V 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
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