The European Union may become the dominant global power in electronic commerce if a new proposal for a "Swiss Army knife" approach to smartcards comes to fruition.
EU member nations are still bitterly divided over the Euro-dollar, but the idea is rising in Brussels that with a nascent currency comes the opportunity to dominate the globe in electronic commerce.
A new discussion paper, to go before the European Parliament shortly, argues that a smartcard for the unified currency will also include all the information necessary for EU citizens to function in 21st-century Europe - including ID cards, driver's licenses, electronic banking cards, and other applications.
"Electronic money is a key element in an information society," said John Stevens, vice chairman of Parliament's monetary affairs subcommittee. "Europe has examined its competitive weaknesses [in information technology] and seen that there may be an advantage in moving to an electronic currency."
"Most countries have ID cards," said Stevens. "This idea of issuing, under a central bank, an electronic purse linked to a read-back function of old money equivalents - why not link to existing identification cards?" Stevens' paper will soon go before the EU's monetary subcommittee.
"Instead of carrying 10 bits of plastic, people carry two or three bits," he said.
Would American digerati dig it?
The concept of a centralized body issuing smartcards tied to electronic purses may be hard to fathom for US digerati. If the US were to adopt a similar strategy, the Federal Reserve Bank would become the hub of smartcard distribution - an near-unfathomable scenario.
Instead, a combination of banks and a host of private corporations, including companies such as CyberCash, are all in the smartcard business. The free market will drive the development of standards and make the cards attractive to consumers.
Yet despite this breadth of US distributors, smartcards will account for only a fraction of commerce, said Scott Smith, director of the digital commerce group for New York-based Jupiter Communications. The majority of US e-commerce activity is in secure online credit-card transactions.
Just over 500 million major US credit cards were active as of mid-1996, according to a January 1997 Jupiter Communications report on US-based electronic commerce. By contrast, the CyberCash wallet - an Internet-based form of virtual cash - was downloaded by about 500,000 users. Of those wallets, only a fraction were active.
By the end of 1998, Jupiter projects, smartcards will account for just over 10 percent of all online purchases, the majority of which will be below $10.
European governments, telcos took lead
Smith attributes Europe's lead in widespread use of smartcards to two factors: Smartcards were first introduced in Europe, and the central governments there played a major role in establishing the technology.
Smartcards began in Europe as part of the national telecommunications companies. For example, when France Telecom wanted to establish its phone cards, it began by replacing coin-operated public telephones with phones that had embedded terminals to read the cards. The computer writes the declining balance into the card's memory as a phone call progresses.
"It helps when you have an entity that says, 'We're going to do this,' and then imposes its standard," said Smith.
All manner of smartcards and electronic purses are already in daily use throughout Europe. In Germany, Lufthansa Airlines has issued a smartcard that carries a customer's frequent-flier mileage. Drivers in Spain pay highway tolls with a smartcard that can be read by a scanner on toll roads. The reader matches the code it reads off the card and debits the person's bank account.
Smith sees the EU smartcard as an easy way to distribute a new currency which would, in essence, be virtual. "It's certainly the fastest track to minting currency. You just flip a switch," he said.
The chip in the smartcard can hold as much as 100 times the information as the magnetic stripes on credit cards, roughly the equivalent of 70 credit cards, said Stevens. With so much space available, the opportunity for applications and, more importantly, revenue streams, abounds.
Centralization issues, social roadblocks
This latter point is key as the EU, in developing its centralized currency and economic structure, will need to rethink how central banks operate. Citing a fall 1996 study by the Basel, Switzerland-based Bank of International Settlements that examined the impact electronic money will have on central banking, Stevens believes finding a way for banks to continue making revenue in an age of electronic purses is essential.
Banks make money on such operations as transaction charges, a revenue stream that may dry up with electronic transactions. To make up for this, Stevens is proposing that banks would sell smartcard distribution rights to private industry. The highest bidder would then be able to sell space to government and private industry for card applications such as identity, banking, travel functions such as ticketing.
The snag once again lies in getting all European countries to buy into it. For example, England is not likely to accept this idea because that society rejects even identity cards. Stevens, who is British, said his compatriots are likely to raise issues of privacy - and sovereignty.
But Stevens realizes his paper is the start of long process of getting government and industry to think about all the issues involved in moving to a new currency.
"With great social issues, there's an economic side, a political side, and increasingly a technological side. This discussion [about smartcards and e-purses] is just the technological side of the single currency issue," said Stevens.
