BY REGINA MARIE GLICK
Staff Writer
Newsday.com

In Hong Kong, "smart" Octopus cards have a hand in hundreds of retail spots, allowing residents to pay for groceries and bus tickets without fumbling for coins or handing their credit cards over to any cashiers.

Five years ago the city adopted the Octopus card system, which uses smart card technology, as its high-tech version of New York's Metrocard, to pay for transit fares. Users wave the cash-value card, which stores electronic funds in a computer chip, in front of a reader that deducts the fare.

Now most of the city's nearly 7 million residents use the card with the microprocessor brain to pay for purchases all over the city in places as disparate as the ParknShop supermarkets to Ocean Park arcades to public swimming pools and parking garages.

However, as convenient as users find these cards, which they obtain with a $50 deposit and an initial stored value, they aren't available in this country. This technology has been slow to catch on in the United States, where businesses aren't convinced they should invest in new scanners and cards. It has been used in isolated programs, mainly on academic and corporate campuses. Students on some campuses use smart cards as combination school ID-debit-key-cafeteria-library- laundry cards.

Among the pioneers, FreedomPay, a Pennsylvania company, sets up in-house debit card systems for businesses, including Holtsville-based Symbol Technologies, which installed Freedom-Pay readers in its cafeteria earlier this year to improve traffic flow.

No waiting

"It's good. You actually don't have to wait on line or carry cash," Pedro Peguero, 42, a technician for Symbol, said during a break as he passed his FreedomPay card, which contains a short-wave antenna, in front of a scanner. Several employees said they would love to use their FreedomPay cards outside of Symbol.

Experts can't predict specifically when smart cards will be in wide use in place of traditional magnetic stripe credit and debit cards, but they say that improving technology and the expanding list of uses for such cards bring that day ever closer.

In its most common incarnation, a smart card looks like a credit card, but it has a gold chip embedded in the plastic that performs like a floppy disk or CD, storing all kinds of information and applications, with more data processing capability than a Commodore 64, a personal computer circa 1985.

The cards, which have been used in Europe for years, can be used not only as a monetary medium to buy things but to store a person's name, checking account and other financial information, and even biometric data such as retinal scans for security identification and medical history, including a list of known allergies.

As the cards gain a foothold here in health care, security and banking, analysts say consumers will learn about them.

Billions used worldwide

Last year, 2.02 billion smart cards were sold worldwide, and that number is expected to grow to 3.11 billion by 2008, said Karthik Nagarajan, an India- based analyst for Frost and Sullivan, a technology and industrial market research firm headquartered in San Jose, Calif.

Most major cellular phone carriers have already incorporated smart card chips, called SIM cards, in their handsets. A user's phone book, plan information and other details can be stored on the chip, and the chip can easily be switched to a new phone.

A spokesman for Cingular Wireless, which uses the cards, said they also improve the quality of calls and provide a more secure network for users.

Other smart-card uses being tested across the country include high-security identification cards for businesses and the military, "contactless" credit and debit cards that don't require swiping or a signature, and medical record cards.

Security assurances

Some people may worry about storing so much personal information on a single, portable medium, but analysts, manufacturers and distributors all tout the dependability of the cards' security systems. They agree the chips are nearly impossible to duplicate, unlike traditional magnetic stripes that are easily read and reproduced, and only the most sophisticated hacker could access the smart card data illegally.

"The processing capability in the card makes it possible to house advanced encryption technology," Nagarajan said.

"To make a fake smart card, it's nearly impossible, compared to creating a fake credit card. A smart card can shut itself down if someone tries to break in," said Paul Beverly, president of Axalto Americas, a Luxembourg-based manufacturer.

Security is what has made smart cards the norm for credit payments across Europe since the technology was developed in the 1970s for use in pay phones, which were often vandalized for coins.

Pressure on credit cards

The three biggest international credit card companies, Europay, Mastercard and Visa, have issued deadlines for retailers outside the United States to switch to smart cards from magnetic stripe cards or they will become personally liable for fraud claims.

"The rest of the world is suffering very badly from fraud. If you hand your mag stripe card to a waitress in a restaurant, she can take the card away and skim the information off using a skim machine and make a duplicate card," said Clare Hirst, a principle analyst in Egham, England, for Gartner Inc., a Connecticut research firm. "And you don't know until you get the shock of your life when you get your statement."

Hirst said the companies have given Europe until January 2005 and Asia until January 2006 to make the switch. Latin America was put on notice to convert by last January but has not yet fully complied, she said.

The problem abroad, she said, stems from the way transactions are processed. Credit card payments in, say, Europe are not verified online instantly as they are here. Businesses often approve payments themselves, store the credit card information in their readers and at the end of the day feed many transactions to the credit card companies' systems all at once. This system, primarily a result of high phone costs, leaves card users more vulnerable to fraud than their American counterparts.

Smart cards themselves can store all of the information needed to determine whether a payment should be approved or not, such as when the card reaches its limit, and can require a PIN to use.

While that added security may also make the chip technology more attractive here in theory, Americans don't suffer from the same rates of fraud and therefore have less incentive to invest in smart card readers.

Replacing readers

"If I go to smart card, the terminals have to be replaced," said Rudy Prokupets, co- founder of Lenel Security Systems in Rochester. "You're talking about millions and millions of dollars. The problem is, Who's going to buy these? Who's going to pay for them?"

Individual readers generally would cost merchants no more than $100 each, and the cost of the cards runs anywhere from $3 to $15 each, depending on the amount of memory on the chip.

Some credit companies contend retailers will be willing to make the investment in hopes of cashing in on quick-pay uses of the cards such as with impulse purchases and instant discount programs, and on the ability to keep lines shorter and customers happy.

Speeding purchases

One program, ExxonMobil's SpeedPass, which uses a device customers can attach to a key chain, has been widely accepted. Since the SpeedPass program began in the mid-1990s, 6 million users have signed up in North America and Singapore.

Then two years ago, MasterCard began a pilot program with its PayPass, a smart credit card with a built-in radio antenna that allows users to pass the card in front of a reader and go, without waiting to receive transaction approval or sign a receipt.

MasterCard officials would not quantify the success of the PayPass in test markets such as Orlando, Fla., and Dallas but said it has done very well and they are preparing to deploy it in other markets.The company hopes to capitalize on a demand for quick payment for small cash transactions -- under $20. PayPass allows a fast, cashless way to pay without letting the card leave your hand.

"That's the U.S. hook into smart card payment," said Hirst. "The idea is that you pay for small transactions like cinema and dry cleaning payments," which is appealing to people who don't carry cash.

Beth Horowitz, senior vice president for MasterCard product services, said the company intends to deploy the cards market by market until they are available across the country.

Hirst agreed the PayPass trials have done well, but she said she is not convinced contactless cards have staying power. "The problem is that we're not sure if that's a trend that's going to last... . Is it just an initial cool factor that they got? Long-term, will retailers put readers in place?"

On the other hand, she said credit cards will eventually adopt the smart chips in the United States as they have in Europe.

"Is America likely to remain the only country that hasn't made the change?" she asked. "I think long term we will see even the financial structure move to smart card as well."

In the meantime, the U.S. government is testing and building its own smart card infrastructure.

Military applications

Michael Butler, deputy director for smart card programs at the Department of Defense, said that for four years the military -- as several other federal departments are doing -- has been developing its own uniform identification card, called a Common Access Card, or CAC, for all military personnel. Although physical security and network access are always concerns, Butler said the biggest incentive to convert to the CAC system is its online signature capabilities, not its ability to store fingerprints.

Smart cards enable users to digitally sign online documents with the same authenticity of a written John Hancock, allowing the department to eliminate a lot of paperwork.

"I think that a lot of agencies understand it's very important, not only for security, but if you want to do e-business, you need to be able to identify people you're dealing with," he said.

Storing medical records

And the ability to identify people and easily summon their medical history is the cornerstone of an ongoing pilot program at Elmhurst Hospital in Queens. The hospital is among the first in the nation to issue smart ID cards storing patient records. Hospital officials hope the cards, now carried by 6,000 patients who see their internists at the hospital, will enable doctors, especially in the ER, to better treat patients.

Right now, only Elmhurst can write information to the cards, but 10 other hospitals in the city are equipped to read from them, including Bellevue Hospital Center, Coney Island Hospital and Jacobi Medical Center, all part of the New York City Health and Hospitals Corp.

Al Marino, chief information officer at Elmhurst, said his hospital is working with other hospitals in the city to expand the system and give all hospitals the ability to read from and write to the cards, producing a comprehensive summary of every patient's medical history.

"There's a huge need for patients to have cards," said Dr. Stuart Kessler, director of emergency medicine at Elmhurst. "Because if people end up in the emergency room, if they're unconscious, their card gives instantaneous information. people don't always know their medications and dosages. From the most- to the least-educated consumer, whether they make a lot of money or are unemployed -- the card is of the same value to them." And if ER patients don't speak English, the cards can speak for them.

For Carlos Stewart, a 78-year- old Jackson Heights resident and Elmhurst patient, it means he might be spared unnecessary tests and dangerous drug interactions if ever he arrives in the ER unconscious. With the card, Stewart said, "I don't have to make a new test. Whatever they need, they have."

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