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 --- Dr.Dimitri Vulis KOTM Brighton Beach Boardwalk BBS, Forest Hills, N.Y.: +1-718-261-2013, 14.4Kbps