Consolidation is on the cards

Electronics Times, Feb 15, 1999

The industry is awash with alliances as card manufacturers offer added services and industrial knowledge in the drive for profit, reports Paul Dempsey

Set aside the ever-varying estimates of its value (see box below), and you could say that the debate in the global smartcard market is now dominated by the three Cs: commoditisation, collaboration and consolidation.

While the public sees smartcards as being rather futuristic, their existing and extensive penetration of lower margin markets has driven production costs down.

According to market analysts at Datamonitor, phonecards already have a unit cost of only $1. Cards for government applications can rise as high in unit cost as $46, but it is a low-volume segment. Simply making cards is no longer that much of a business.

Trends towards commoditisation have, as Datamonitor points out in a report*, led companies to focus on other ways of adding value.

The company said: "This is particularly visible in the reaction of the card manufacturers to the falling profit margins in their product area. They are expanding their portfolios towards offering services, using their industry knowledge and brand power to increase their opportunity for profitability."

The money in smartcards today is in putting everything together, marrying the new offerings to legacy systems and preparing for the addition of further functions as the sector moves towards its holy grail: the multi-application card.

Datamonitor notes: "Systems integrators are in the more enviable position of providing the component with the greatest share of market value and steady growth... they are already in the area with the highest profit margin."

With the industry lacking any real one-stop shops, an emphasis on service, implementation and integration has inevitably increased the number of strategic partnerships.

One example of collaboration is the Transys consortium, which is supplying a #1bn contactless smartcard ticketing system for London Transport, called Prestige. Its members are technology groups EDS and ICL, consultancy WS Atkins and US automated fare collection specialist Cubic Transportation.

But forces driving such alliances go beyond the demands of securing margins, and an additional element for Transys is dealing with high- cost capital projects.

Heiko Haasler, a strategy analyst at smartcard supplier De La Rue Card Systems, argues that another important factor is the need for major players to drive smartcard usage through different markets.

"For example, once you have the leading banks and credit card companies embracing the technology, that will push smaller organisations into using it," he said.

He cites as an example the creation last October of the Global Trust Enterprise, which brought together eight international banks to address the reliability of e-commerce systems.

Haasler said: "That project was a major breakthrough because it gave you an idea of how progress could be made. Traders will listen to voices like those."

There are also the competing standards and platforms and, on the alliance front, their promoters have been equally busy. More recent entrant Microsoft has got backing for its smartcard for Windows offering from key sector players Gemplus and ICL.

But credit card giant Visa, which favours a Java-based platform, heads the charge. It has struck an alliance with banking clearance networks ZKA (Germany), Sermepa (Spain), Cartes Bancaires (France) and Nets (Singapore) to create common electronic purse specifications (CEPS).

Mastercard subsidiary Mondex International, which supports the third competing platform Multos, acknowledges that there is "a race to develop partnerships", particularly among card issuers.

Douglas Robb, the company's director of strategy and planning, said: "A lot of companies are involved in competition to create footprints, to become lead issuers. The thinking behind this, especially for the banks, is that, if you make your company the core issuer of smartcards, you put yourself at the centre of the future infrastructure."

Given its Mastercard ties, Mondex has ensured that it has played a role in the process, and has secured a potentially vital agreement in Norway for the use of its technology.

Robb said: "This could be important for us. One of the attractive aspects of the Norwegian market is that e-commerce has already been accepted as the next business infrastructure which has to be built. They are not being tentative about it. So, you will see a rapid and co- ordinated roll-out."

Collaboration is about meeting the costs and finding the partners to give you a technological leg-up into pole position. And, even in maturer markets, the pressures to advance systems and standards are intensifying.

SJB Research, which produces an annual report, The Smart Card*, is clear in its latest edition about much of what is at stake, particularly in Europe, currently the best market for smartcard penetration and expected to remain so in the future.

SIB said: "The first [electronic] purses were designed as national payment systems; they echoed the diversity of currencies used in different European countries. But, for once, the politicians have been ahead of the bankers; the advent of the euro seems to have taken the smartcard industry by surprise.