Ali Mercieca is a Finance Writer and Content Editor at Ramp. Prior to Ramp, she worked with Robinhood on the editorial strategy for their financial literacy articles and with Nearside, an online banking platform, overseeing their banking and finance blog. Ali holds a B.A. in Psychology and Philosophy from York University and can be found writing about editorial content strategy and SEO on her Substack.
https://www.linkedin.com/in/ali-mercieca-4443b3121 York University
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Technology has come a long way, and the rise of microchips has led to increased use of smart cards. Smart card technology is used to make payments, verify identities, and more.
In this article, we’ll define smart cards and explain what they’re used for, how they work, and how the financial landscape is changing because of them.
A smart card is a physical card that has a built-in memory chip, allowing it to transfer data electronically. Credit cards, SIM cards, and certain ID cards are all examples of smart cards. Smart cards can maintain all of their necessary functions and details without having to connect to any external databases thanks to their integrated circuits.
Smart cards are used to verify identities, authenticate access, store data, and transfer payments. Virtual business cards are also examples of smart cards.
In 2019, the global smart card market was valued at about $10.19 Billion. It’s expected to reach $15.57 Billion by 2027. This means that the market will grow at a CAGR of 6.2% from 2020–2027.
Banks and credit card providers have also been encouraging the use of contactless smart cards and the COVID-19 pandemic has only helped their cause. By the middle of 2020, Visa had 93 million contactless smart cards in circulation. Smart cards have become a major payment channel, offering an alternative to other modes of payment like ACH payments and EDI payments.
Smart cards are subject to international standards and requirements (ISO/IEC 7816 and ISO/IEC 14443) because they need to ensure interoperability, security, and reliability across various platforms and devices worldwide. These standards dictate the physical characteristics, communication protocols, and application programming interfaces for cards used in banking, telecommunications, and other smart card applications.
Smart cards usually have the following characteristics:
Smart cards can perform in two ways, through contact or contactless. Contact smart cards will be inserted into a smart card reader. Contactless smart cards will use radio waves to communicate with a reader. An external smart card reader powers a smart card. The smart card communicates with the card reader via a Radio Frequency Identification (RFID) chip or a Carrier Sensing Collision Detection (CSCD) system protocol.
Smart cards rely on a card reader for operation and cannot function independently. Each smart card contains a chip with a contact pad, enabling electronic communication with the card reader.
The process of how smart cards operate involves these steps:
A serial interface exchanges data between the smart card and card reader. Here are some of the ways the two communicate:
The processor inside smart cards contains operating systems that perform various functions such as data transmission and storage, and keep that data secure.
Most industries have adopted smart cards in some way, either for business or entertainment purposes. Here are some of the most common ways smart cards are used:
Smart card readers are devices used to interact with smart cards, facilitating secure access and transactions. These readers come in two main types:
Contact smart card readers:
Contactless smart card readers:
Smart card readers are integral to modern secure access and payment systems, providing a blend of security, efficiency, and user convenience.
Smart cards are categorized by their data read/write capabilities, chip type, and chip capabilities. There are various types of smart cards, as detailed below.
These two major types of smart cards have different properties and uses. Electrical connectors connect a contact smart card to the card reader that transmits data. The card's gold-plated covering holds the electronic cardholder certificate.
However, you can use contactless smart cards by simply tapping them on the card reader. They use RFID or NFC technology and transmit data seamlessly.
Hybrid cards are more technologically advanced than other types of smart cards. They’re embedded with memory and microprocessor chips. The proximity chip allows physical access to restricted places, while the contact smart card chip verifies sign-in details.
Dual-interface smart cards can be used in both contactless and contact payments. These cards typically work with EMV readers but also contain NFC chips to transfer information. Most bank cards are dual interface cards.
These cards contain an IC microchip with a microprocessor and memory. They can be contactless or need contact to transfer data. Microprocessor cards contain sophisticated architecture like Java and dot net powering their functions. They can store complex data such as business credit scores, helping you track business expenses.
Memory cards serve like a temporary smart card, the data cannot be edited or changed after programming. The cards store data without a microprocessor, relying solely on non-volatile memory. They are commonly used in SIM cards and prepaid cards. These cards feature basic security, including data encryption and access control, making them ideal for storing personal information and transaction records. Because of their low memory capacity they are often discarded after their use, similar to a prepaid money card.
Smart cards are capable of many functions as well as payment while bank cards are used primarily for financial transactions. A smart card is embedded with a microprocessor chip that allows it to store and process data, enabling functionalities such as encryption and digital authentication. A debit card, on the other hand, is a plastic card that’s directly linked to a bank account and primarily used for financial transactions, typically relying on a magnetic stripe, or magstripe, for security.
Both smart cards and credit cards contain embedded chips, but while a smart card uses its microprocessor for complex data processing and secure transactions, a credit card primarily provides a line of credit for financial transactions with simpler security features. Debit and credit cards with just a magnetic stripe are less secure than smart cards, which is why companies like Mastercard are starting to phase them out. In the near future, our cards may only contain chip technology.
Both a smart card and a SIM card are embedded with microprocessors, but while the smart card serves multiple purposes such as secure transactions and identity verification, a SIM card is specifically tailored for mobile devices to store network and subscriber information and enable communication services.
Smart cards offer several advantages but a few disadvantages too. Here they are in no particular order.
The smart card, in its first rendition, was invented in 1959. German engineers integrated the electronic chip with plastic in the late 1960s. Here’s a brief timeline of smart card development since then:
Roland Moreno conceptualized the smart cards in the mid-1970s and patented the memory card in 1974. Bull CP8, SGS Thomson, and Schlumberger further developed smart cards in 1977.
Michel Hugon of Bull CP8 created the first fully functioning microprocessor-based card with local memory in March 1979. He invented the computerized smart card.
The use of smart cards in the banking sector started in France in 1974. A portable memory device was invented by a French engineer that offered more secure and reliable payment methods. It spread across France in 1988 and was exported to the rest of the world in 1997.
Smart cards took time to gain a foothold in Europe. This is due to how expensive they were relative to magnetic-strip cards at the time. It wasn’t until 2006 that most European banks introduced smart cards.
The first ever SIM card was developed in 1991, and around 300 SIM cards were sold to Finnish wireless network operators. Today, SIM cards connect seven billion devices to cellular networks across the globe.
Finland was the first country to implement electronic IDs in 1999. In 2003, these were upgraded to national ID cards, which enabled the use of digital signatures. Eventually, these cards came to store health information along with ID data.
Setec equipped Norway with electronic smart passports in 2005. Norwegian biometric passports meet ICAO and EU security standards. The passport's microchips contain the holder's personal information and digital photo.
The smart card market is expected to expand exponentially, primarily due to the rise of digital national ID and SIM cards. SIM cards accounted for 42% of the smart card market in 2020. It increased to 50% of the total market less than a year later.
COVID-19 massively increased the demand for smart cards. As businesses trend toward private communication, cellular technologies such as 5G, LTE, eSIM, and M2M, smart card adoption is increasing.
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Smart cards are here to stay and are set to grow even bigger. Thanks to their applications in finance, identity management, and healthcare, smart card usage will increase significantly, changing our lives for the better.
See how Ramp’s smart corporate cards can streamline your business expense management.
