American Banker: Tuesday, September 10, 1996
Two German Companies Tap U.S. Smart Card Market
By VALERIE BLOCK
Two German smart card manufacturers that have set their sights on the
United States are finding the market big enough for two different
strategic approaches.
Gieseke & Devrient America Inc., subsidiary of a German currency
printer, has become a major supplier of Visa Cash cards, firmly
entrenching itself in the world of banking applications. Orga Card
Systems Inc., whose German parent is owned by three corporations in that
country, is going after the telecommunications industry here.
In August, Orga secured a million-card minimum commitment from Omnipoint
Corp. for the new digital mobile phone technology known as personal
communication services. The deal, covering the New York area, could mean
as many as three million cards over three years.
Smart cards, with embedded computer chips, contain customer account
information and would be used to activate the mobile phone. Orga inked a
deal last fall with American Personal Communications, another provider
of personal communications services, to supply smart cards for its
Sprint Spectrum service in the Washington area.
"We're big in telecommunications," said Holger Mackenthun, president of
the U.S. Orga operation in Paoli, Pa. "That's where most of the (smart
card) applications are."
Benjamin Miller, chairman of CardTech/SecurTech, the Rockville, Md.-
based conference organizer, called Orga a "major worldwide player" in
global standard for mobile telecommunications, or GSM, the international
version of the digital mobile phone network.
Gieseke & Devrient, with a 150-year history of currency printing,"is
tied culturally to the financial industry," said Joseph Schuler, senior
vice president of Schlumberger, a leading French smart card company with
operations here. Schlumberger and its home-country competitors, Gemplus
and Bull Group, supply the lion's share of smart cards in the United
States and around the world.
Still, Mr. Schuler said the expansion of the U.S. market will create
opportunities for all the manufacturers.
In Supplying 800,000 cards to NationsBank for the Olympics Visa Cash
pilot in Atlanta, Gieseke & Devrient established a firm alliance with
Visa. It is vying to participate in the New York smart card test
scheduled to begin early next year with Visa, MasterCard, Citicorp, and
Chase Manhattan Corp.
The German company also supplied card-dispensing machines to Wachovia
Corp. for the Atlanta pilot and 5,000 Visa Cash cards for BankAmerica
Corp.'s limited-edition Olympic series. R. Kirk Brafford, program
manager, Gieseke & Devrient in Reston, Va., said since his hiring in
1994, he has laid groundwork, established relationships, and generally
spread the word about the company.
"Things started to kick in last fall with Visa Cash," he said. While
profits have not yet materialized for U.S. operations, its German
parent, Gieseke & Devrient GmbH posted $240 million in card revenues for
1995. Orga's German parent, Orga Kartensysteme GmbH, garnered $85
million in card revenues for 1995.
Mr. Brafford said Gieseke & Devrient has been a global standard for
mobile telecommunications pioneer in Germany and elsewhere. It competes
for personal communication services applications as well as prepaid
phone cards and other telecommunications applications, but it has been
held back by a fastidious "quality orientation," said Mr. Miller.
Over-the-air initialization for digital mobile communications had not
been standardized, so Gieseke & Devrient didn't offer the feature that
other companies, like Orga, promoted through proprietary means.
Mr. Brafford said a standard was recently put in place, and the company
will offer the feature soon. He also said the organization is working
with several satellite communications companies to supply smart cards
for their activation systems.
Orga -- owned by Preussag, a giant German steel maker; Bundesdruckerei,
a federal printing company comparable to the U.S. Mint; and Detecon, a
consultancy owned by Deutsche Telekom, Deutsche Bank, and Dresdner Bank
-- was formed 11 years ago as a smart card producer for global standard
for mobile telecommunications and prepaid phone applications. It has
been less aggressive in the financial services industry.
Several industry sources said Preussag is dissatisfied with the company
and wants to divest. Mr. Mackenthun said the steel maker may indeed sell
its shares to the other two owners, to better concentrate on its core
business.
Orga also suffered a setback in its attempt to secure a card
manufacturing base in the United States. It announced a joint venture
last year with Kirk Plastic Co., which could have given Orga a U.S.
presence similar to those of Gemplus or Schlumberger. That deal fell
through, and last month Kirk Plastic, the second-largest bank card
producer in the United States, was sold to Francois-Charles Oberthur, a
French currency printer that co-owns a smart card operation with Bull
Group.
Kirk Hyde, president of Los Angeles-based Kirk Plastic, said Orga was
stumbling in the banking arena, but other observers said financial
differences split the companies.
Though Orga supplied 20,000 reloadable, stored-value cards for
MasterCard's Australian smart card pilot, the company is not bidding on
the New York test. Mr. Mackenthun said that was because it cannot
produce cards and personalize them here.
Still, Mr. Mackenthun is optimistic that Orga will either purchase
another plastics maker or set up personalizing facilities of its own in
the near future.
Gieseke & Devrient acquired Security Card Systems of Toronto earlier
this year and has a plant in Mexico City. It expects to purchase a U.S.
facility as well. Through its Toronto facility, it will manufacture
cards for Mondex's Canadian issuers.
InformationWeek: September 9, 1996
Wall Street Sharing Data To Get An Edge
By Udayan Gupta
If you listen to all the media stories about Wall Street and technology,
you may come away convinced that preparing systems for the year 2000 is
subsuming all other technology projects in the financial community.
Nothing could be further from the truth. Sure, making the year 2000's
two-zero datefields work is a nagging headache. But a bigger concern for
Wall Street is how to keep pace with technology without tearing apart
the whole organization. How does a company adopt the latest systems and
software, train users, and still not miss a beat in its regular
business?
The choice for many financial services companies is to expand the use of
and access to technology within the organization, focusing on
connectivity and improved productivity. "We aren't slowing down on the
introduction of technology. We simply are stepping up our technology
training," says Howard Sorgen, CIO at Merrill Lynch & Co. in New York.
Speed and data availability have been the key competitive elements for
financial services companies. To gain an edge in these areas, companies
have experimented with a wide array of technology. But such
experimentation has takenplace with little internal coordination,
leaving large financial institutions with disparate and confusing
systems.
Not surprisingly, financial services companies are consolidating their
technology, says Jim Ogorchock, business development manager for
financial services at EMC Co., a Hopkinton, Mass., data storage
provider. Consolidation has meant finding ways to disseminate data and
information across the enterprise and making data easier to use, he
explains. There is greater emphasis on data warehousing, for example,and
on finding ways to make data more accessible.
ESI Securities Co., a New York broker that specializes in trading
technology, is also looking for ways to make data more accessible to
more people. "We have moved from being a linear information process to
an integrated process," says Jeanne Murtaugh, ESI's vice chair. Instead
of different people handling data at various points in the chain, one
person can have access to all data at once, dramatically cutting the
time it takes to act on the data.
At many financial institutions, the focus is on expanding choice and
connectivity, says Murtaugh. ESI has found that there is big demand for
its trading products and services because they give users greater
flexibility and are compatible with other systems.
Not The Enemy
Connectivity also is being sought through the Internet, says Matt de
Ganon, president of K2 Systems, a New York Internet access designer.
"Financial services companies are recognizing that the Net isn't an
enemy competing to provide services. It's an additional conduit," de
Ganon says. He adds that a growing number of financial services
companies are willing to use the Internet to provide data to investors.
The Internet is also seen as a transactional tool, one that allows data
gathering and information dissemination at a more rapid and
cost-efficient rate. Equifax Inc., for example, plans to make credit
data available to its subscribers on the Net, providing easier access to
the data at vastly reduced prices, says Dan McGlaughlin, president and
chief technology officer of the Atlanta company. Equifax keeps credit
information on nearly 200 million U.S. consumers.
Acceptance of the Internet as an integral business tool is only part of
the change at financial services companies. Many of them are abandoning
proprietary software and hardware for more generic solutions, especially
if those solutions provide the choices and connectivity that companies
need. Technology users are searching for a common platform that can
provide ready solutions and is easily scalable, says Jonathan Wolf, VP
of marketing and sales for Track Data, a New York provider of market
data systems.
Increasingly, IT executives at financial services companies are looking
at a Windows NT environment, Wolf says. Many of the companies that
traditionally havehad Unix environments-such as First Boston and J.P.
Morgan-are looking for greater connectivity. They are implementing
off-the-shelf solutions instead of insisting on proprietary systems,
Wolf adds.
Nowhere is this desire for choice and connectivity more intense than at
Merrill Lynch, the financial services company with the highest annual IT
expenditure.
This month, Merrill Lynch will launch Trusted Global Advisor, a
technology platform for its financial consultants. The system consists
of 25,000 IBM multimedia PCs using the Microsoft Windows NT operating
system and linked by 1,200 servers.
Using the NT platform "allows us to buy our applications rather than
build," says CIO Sorgen. Merrill Lynch still uses Unix for
industrial-type applications such as data-intensive analytical
computation, but NT will become the norm for retail applications, he
adds.
By turning to off-the-shelf applications, Merrill Lynch hopes to cut the
cost of technology consultants. In order to hasten the use of new
technology, the company relied heavily on outside consultants. Indeed,
almost 20% of the company's IT expenditures over the past five years
went to pay for outside help, says Sorgen. Now Merrill Lynch is looking
to widely available solutions and in-house training to sharply reduce
its technology personnel cost.
Keeping Control
Not that the company wants to avoid everything proprietary. Merrill
Lynch is following the lead of financial institutions such as Citibank
in offering its retail customers an online service with a wide range of
uses-from stock quotes and other financial information to direct orders
to financial consultants.
But instead of making the online service available on popular online
networks, Merrill Lynch plans to maintain control over its customers'
data. "You really don't want to allow sensitive data to pass across the
Net without the development of some real security safeguards," says
Sorgen.
Just down the block from Merrill Lynch, American Express is taking a
slightly different tack. It, too, is focusing on technology integration,
but American Express wants to create a global platform that is both easy
to use and scalable.
American Express already has invested heavily in its ExpressNet and is
focusing on developing a World Wide Web site for its small- business
customers. In late July, it announced a joint venture with Microsoft to
develop a travel service on the Internet (IW, Aug. 5, p. 35).
Channel Change
CIO Allan Loren says American Express is focused on two main
goals:reengineering the company and helping to deliver new products.
"We're changing distribution channels," says Loren, emphasizing the use
of the Internet in helping distribute new products and expand the
transactional capabilities of the company.
Nearly half of IT expenditures at American Express is going toward
reengineering and new product development, Loren estimates, and about
40% is being used to maintain its technology operations. The rest is
being used to determine new directions for the company in a highly
charged and competitive business environment.
For other financial services companies, the technology challenge has
been to find expanded use for data and consequently develop a broader
range of products,says Equifax president McGlaughlin. Investment in
technology at Equifax is related to moving away from mass-marketed,
commodity information to more customized information solutions, he says.
The company also is attempting to create more real-time data. Its data
gatherers use notebook computers to record and transmit data, and the
company plans a major investment in parallel processors to handle the
bigger volume of data it hopes to soon generate.
Three years ago, all of Equifax's data was stored in mainframes,
available only to Equifax technical staff. Now, says McGlaughlin, with
the mainframes replaced by servers and networked PCs, nearly two-thirds
of the data is at customer terminals.
"We're much closer to the leading edge now," he says. "New technology
has allowed us to free up our resources and devote more of them to
developing applications rather than storing data."
Too often in the past, technology investment has meant large computers
and proprietary software, resulting in systems that didn't allow
enterprisewide use of technology. The front and back offices remained
separate entities.
Now, with the expanded availability of application software-ranging from
enterprise resource planning to object-oriented databases-it has been
possible to gradually merge the front and back offices and give users
more data and more tools with which to use data.
The result, industry executives say, isn't simply improved productivity
but also sharply reduced costs to the entire enterprise.
Reuters: Wednesday, September 11, 1996
Industry Groups Lobby for More Encryption Exports
By Aaron Pressman
A broad coalition of corporations went to Capitol Hill on Tuesday to
lobby in favor of relaxed export restrictions on computer encoding
technology.
On Thursday, the Senate Commerce Committee will mark-up the Promotion of
Commerce Online in the Digital Era Act of 1996 known as Pro-CODE, a bill
that would abolish most export restrictions.
Under a Cold War-era munitions statute, only weak encryption programs
created in the United States can be sold abroad, although domestic use
of encryption is not regulated.
Companies in the high-tech industry argued they are losing business to
foreign competitors who are not bound by U.S. export restrictions. And
multinational companies in other industries said the the restrictions
hamper their ability to conduct business overseas.
"We are at a competitive disadvantage vis-a-vis our foreign competitors
and that is an unacceptable situation," Gregory Garcia, director of
international trade affairs for the American Electronics Association,
said at a press briefing here.
The Pro-Code bill, sponsored by Republican Senator Conrad Burns of
Montana, Democratic Senator Pat Leahy of Vermont and others, has
bipartisan support in the Commerce Committee. "We support the Burns bill
because it does enable companies to utilize encryption technology
securely which is vital if we're going to compete in a very tough global
marketplace," Victor Parra, president of the Electronic Messaging
Association, said.
The association represents companies that rely on electronic
communications, including Exxon Corp , Citicorp and Boeing, Parra said.
Encryption programs use mathematical formulas to scramble information
and render it unreadable without a password or software "key."
Earlier this week, Senator James Exon, the Nebraska Democrat, came out
against the current bill in a letter to Commerce Committee chairman Sen
Larry Pressler. Exon will likely offer amendments at the mark-up, an
aide to the senator said.
The Clinton administration opposes the Pro-CODE bill, arguing that
export of encryption technology would hamper law enforcement and
intelligence gathering operatiobns.
The House Judiciary Committee will hold a hearing on a similiar measure
on September 25.
Financial Times: Thursday, September 12, 1996
Japan on the Fast Track for the Electronic Purse
By William Dawkins
LONDON-- Japan yesterday belatedly joined the international race for a
cashless society, when Nippon Telegraph and Telephone, the
telecommunications giant, unveiled what it claims will be a secure yet
confidential electronic purse that could be used by any bank account
holder. The electronic money system, developed with the help of a
think-tank attached to the Japanese central bank, aims to provide
consumers with a "smart" card which would be used to buy goods and
services in shops, vending machines or over the Internet and could be
topped up by being plugged into a cash dispenser or telephone. In common
with some other systems, the Japanese version would also give customers
personal digital signatures, to stem fraud.
Smart cards contain computer microchips - rather than the magnetic strip
that has become the industry standard - which enable them to be used not
only to carry out financial transactions but also to store data.
The NTT card is similar to other electronic purses, such as the one
being tested by Mondex, a UK-led global consortium of 17 banks, which
has run a trial of its card in in Britain for more than a year.
The market for electronic purses is being contested by global credit and
charge card organisations Visa, MasterCard and Europay, which are all
holding trials of their own cards. What NTT claims is unique about its
plan is that it envisages the establishment of a digital central bank,
which would issue electronic cash on the cards to customers in
co-operation with the retail banks where they hold accounts. The aim,
said Mr Hiroshi Yasuda, an NTT executive, is to enable participating
banks to issue compatible electronic purses, thus avoiding the
competition over technical standards which has dogged other systems.
Mondex, for example, does not comply with technical standards for chip
cards set by Europay, MasterCard and Visa. Some critics of Mondex say it
will falter internationally because of this non-compliance. However,
Mondex says standards are important only in that card-users and
retailers do not want to have multiple point-of-sale terminals to accept
the cards.
Understandably, NTT wishes to retain technical mastery of the system,
which is why it has applied for a Japanese patent for the computer
software that would enable the digital central bank and private sector
banks to operate together. Electronic purses operators across the world
say that it will take at least a decade for consumers to make the switch
in large numbers. The change is likely to take longer in Japan, where
consumers and companies favour paper money.
Most small and medium-sized companies still pay suppliers in paper,
delivered in person. Banks refuse to set up standing orders. Cash is
instead sent by post. Credit and charge cards are not widely accepted.
The average citizen's wallet bulges with cash, not cards.
The NTT proposal is the strongest of several rival and incompatible
Japanese experiments, carried out by the Ministry of International Trade
and Industry and the Ministry of Posts and Telecommunications. NTT will
ask the ministries to adopt its system, to pave the way for a single
standard cashless nation. William Dawkins
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