Centrelink
Smart Card Technical Issues Starter Kit
Chapter 2

Roger Clarke

Principal, Xamax Consultancy Pty Ltd, Canberra

Visiting Fellow, Department of Computer Science, Australian National University

Version of 8 April 1998

© Xamax Consultancy Pty Ltd, 1998

This document was prepared for Centrelink. Its purpose was to support the consultation process between Centrelink and privacy advocates, during a project that was intended to lay the foundations for a variety of projects for Centrelink's client agencies that it was anticipated would involve smart cards

This is chapter 2 of an 8-part document whose contents-page is at http://www.anu.edu.au/people/Roger.Clarke/DV/SCTISK.html

2. Applications of Smart Cards
2.1 Applications Generally

Smart cards are programmable, and lend themselves to incorporation within many different kinds of system. It is useful to describe their applications in two complementary ways, firstly according to the general category of purpose to which they are put, and secondly according to the industry setting within which they are applied.

* Generic Functions

There is a variety of general purposes to which smart cards can be put. These are:

• authentication:
  • of the identity of the card-holder ('identity authentication');
  • of the data or transaction's origin, integrity and non-repudiability ('digital signature');
  • of the authority of the card-holder to conduct a transaction ('eligibility authentication');
  • of the value of data stored or being transferred ('value authentication');
  • of the legitimacy of other chips and accepting devices;
• data storage, in particular of:
  • transaction trail;
  • account balances;
  • reference data; and
  • cryptographic keys;
• data processing. in particular:
  • transaction processing and authorisation;
  • communications; and
  • balance accumulation; and
  • cryptographic processing.

* Sectoral Applications

There are many specific applications of the generic functions within particular industry sectors. In many instances, these discrete applications are capable of being combined within a single scheme. Important sectoral applications include:

• access control:
  • to physical sites, buildings and spaces;
  • to data and software (commonly referred to as 'logical access control', e.g. logins to email accounts and tele-banking); and
  • to services, and especially to data transmissions (e.g. pay TV, GSM mobile telephony);
• membership and affiliation:
  • corporations;
  • associations and clubs; and
  • tourism arrangements;
• financial applications, including:
  • stored-value, also referred to as 'pre-paid cards', 'electronic tokens', 'electronic purses', 'electronic cash', and 'digital money', for:
    • retail purchases;
    • vending machines;
    • parking payment-machines and meters;
    • road usage levies, including tolls; and
    • specific purposes, such as multi-trip bus tickets;
  • credit cards (payment against a line of revolving credit); and
  • debit cards (payment against the account-holder's own funds);
• account charging (e.g. for telephone calls, pay-television, tele-banking, tele-shopping, parking, and road-usage);
• ticketing / subscription (a particular form of 'eligibility authentication'):
  • public transport period tickets, for buses, trains, trams, etc.;
  • airline tickets and boarding authorities;
  • road usage levies, including tolls;
  • sporting and leisure venues; and
  • entertainment;
• pricing, including eligibility authentication for, and calculation of, subsidies and concessions, in relation to such matters as:
  • access to transport;
  • access to public venues such as swimming pools and galleries;
  • purchase of items such as pharmaceuticals; and
  • purchases by tourists;
• usage accumulation and incentive schemes:
  • card-issuer loyalty;
  • card-usage frequency rewards; and
  • tourism arrangements;
• personal data storage:
  • health data;
  • cryptographic keys; and
  • passwords, PINs and biometrics.

As with most technologies which have potentially revolutionary consequences, there have been a considerable number of false starts, and pilot projects which satisfied the participants that the proposal as then conceived should not proceed. The accumulation of experience from the many pilots in many different settings is leading to increasingly well-conceived pilot projects, and promising results.

The above comprises revised extracts from:

Clarke R. (1996) 'Chip-Based Payment Schemes: Stored-Value Cards and Beyond' Xamax Consultancy Pty Ltd, Canberra, September 1996, pp. 4-7. For further information, see here.

ETC (1997) 'The Need for a Smart Card Strategy' ETC / CardsETC / Xamax, Report for Multimedia Victoria, April 1997

GTTC (1997) 'Smart Cards as National Infrastructure' Government Technology & Telecommunications Committee, September 1997, p.116

2.2 Stored-Value Cards (SVCs)

There are many potential applications of smart cards in financial services. One that is worthy of special attention is so-called 'stored-value card' (SVC), by which is meant a card that can be used for low-value payments at devices that, unlike EFT/POS terminals, are not permanently connected via an expensive communications link back to a host service. This application is important because of the long-standing expectation that stored-value cards, or multi-purpose cards which include a stored-value function, will be the means whereby smart cards become mainstream consumer tools.

Analysis of the economics of payment systems shows that the cost of collecting value from customers is significant, particularly in the case of low-value purchases (Walters 1992). There is a wide range of circumstances in which large numbers of low-value transactions generate in total a significant volume of cash; for example at public telephone-boxes, for tickets for trains, buses, ferries, cable-cars, etc., for tickets for cinemas, theatres, museums, exhibitions, and other entertainment and public events, and for purchases from vending machines for such goods as newspapers, stamps, cigarettes and confectionery. This gives rise to the need for cash-handling, and a significant levels of crime and vandalism.

Chip-cards offer the potential to save costs by replacing physical cash with electronic cash. It has been estimated that 80-90% of the costs incurred in transaction processing are in order to ensure correct accounting, and that these costs can be greatly reduced by cumulating value rather than fully processing every transaction; for example, such cumulation may be carried out by counting down the value of prepaid cards. From the privacy perspective, it has been shown to be feasible to ensure that such electronic transactions are anonymous but nonetheless secure (Chaum 1985).

A variety of means have been implemented whereby people can load value onto a card, and use it to make payments at appropriately equipped, unattended devices. These include multiple-use tickets for public transport, and telephone cards. Schemes that store data using punched holes, and even magnetic stripes, are highly insecure, and very easy to defraud. Since the mid-1980s, a variety of chip-based SVC trials have been held, and a small number of schemes have come into operation.

During 1995-96, four separate pilots of chip-based SVCs were run in Australia. Two were by local companies, and combined payment facilities for low-value transactions in various consumer outlets, together with transport ticketing. One of these, Quicklink was a trial of the scheme which has the world's largest volume of SVCs on issue, Proton (Clarke 1996, pp.81-90).

The other, Transcard, has continued in operation, and is depicted in Exhibit 2. Transcards are loaded with value in return for cash, or against a debit-card or credit-card transaction. The value is used on terminals both on merchants' premises and free-standing at public locations. The transaction totals are transmitted periodically (typically daily) from the terminal to the host processor, and the merchant's bank is advised to credit the merchant's account. This particular scheme also supports ticketing, frequency and incentive rewards, and membership applications (Clarke 1996, pp.91-120).

Exhibit 2: An Example SVC Scheme

After Clarke (1996), p.94

The other two Australian pilots were the world's first field trials of SVCs by the giants of the payments processing scene, Visa and MasterCard (Clarke 1996, pp. 121-152). That this country was chosen for this purpose is a tribute to Australian technical capabilities, and to Australian consumers' readiness to adopt new technologies.

Subsequently, the major Australian banks have taken up the local franchise for the Mondex SVC scheme, and made commitments to implement it. This originally U.K. initiative (Clarke 1996, pp.153-178) is now majority-owned by MasterCard.

In the interim, Telstra has launched the Chipper technology in public telephones, with the stated intention of rapid deployment, and early extension into other kinds of payments.

SVCs are attractive to merchants because they reduce cash-handling and change-counting tasks, as well as cash-holdings and the attendant risks of error, cashier theft and robbery. For consumers, the benefits include reduced 'wallet-bulge', less cash-handling and change-counting, and the scope for multiple functions within a single, convenient and familiar card.

Some banks may choose to leave SVC operation to third parties, and merely handle the deposits received from merchants via scheme operators. There will be an indirect benefit for banks through the reduction in their own costly cash-handling and the carriage of cash-float. Other banks perceive the growth in SVC usage as an opportunity to enhance customer relationships. These institutions are seeking to at least co-badge SVCs, and in some cases to play the role of scheme-operator.

To date, the Australian schemes have met with mixed success. In general, technical feasibility and reliability have been fully demonstrated. The achievement of sufficiently high adoption rates and hence economic feasibility, on the other hand, appears to depend on the ability to achieve critical mass across several dimensions.

A vital lesson needs to be learnt from the experience with EFT/POS. Until the 'any-card/any-terminal' condition was fulfilled, consumers and merchants alike regarded the technology with scepticism, and early-adopter institutions had their fingers burnt. Consumers and merchants need the assurance that SVC schemes will not be fragmented through unhelpful forms of competition.

Another concern is the breadth of useability of the card. Experience has been gathered in this regard, because the four Australian pilots have tested the kinds of outlets at which people are prepared to use a card in preference to notes and coins, and have provided evidence of the kinds of additional uses that can gainfully complement stored-value.

The above is a revised extract from:

Clarke R. (1997) 'Smart Cards in Banking and Finance' The Australian Banker 111,2 (April 1997)

Clarke R. (1996) 'Chip-Based Payment Schemes: Stored-Value Cards and Beyond' Xamax Consultancy Pty Ltd, Canberra, September 1996, pp. 4-7. For further information, see here.

References

Chaum D. (1985) 'Security Without Identification: Transaction Systems to Make Big Brother Obsolete' Commun. ACM 28, 10 (October 1985)

Walters M. (1992) 'An Argument for 'Smart' Financial Transaction Cards in the Australian Payments System', in Clarke R. & Cameron J. (Eds.) 'Managing Information Technology's Organisational Impact, II' North-Holland/Elsevier, Amsterdam, 1992

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Created: 14 July 1998

Last Amended: 14 July 1998

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