The Security of Smart Cards: Some Obstacles Still to be Cleared?
| DOI | https://doi.org/10.1108/eb025734 |
| Date | 01 February 1996 |
| Pages | 353-359 |
| Published date | 01 February 1996 |
| Author | James Backhouse |
| Subject Matter | Accounting & finance |
Journal of Financial Crime — Vol. 3 No. 4 — Computer Security
COMPUTER SECURITY
The Security of Smart Cards: Some Obstacles Still
to be Cleared?
James Backhouse
Smart cards are being toted as the secure means of
payment for the future. But there are still some
security and legal issues to resolve. This article
evaluates current security methods for smart cards
and briefly reviews existing legislation related to
their use.1
There are many different forms of electronic
money for payment of goods and services and they
can be generally classified into three categories,
namely electronic credit, electronic debit and elec-
tronic cash. To make payments with electronic
credit, the customers require a credit card with
extended credit up to an agreed limit at a pub-
lished rate of interest.2 Electronic debit, also called
electronic fund transfer at point of sale (eftpos),
involves a debit card in which the holder presents
the card at the points of
sale
and the agreed sum is
debited immediately from the holder's account and
credited to the merchant's account.
As with electronic credit and debit, the customer
using electronic cash also requires a plastic card to
function as an electronic purse. An electronic
purse is a stored value card. There are two basic
types of electronic purse: non-reusable and reus-
able.
The non-reusable type is normally made of
magnetic stripe card and is pre-loaded with a fixed
amount of electronic money. The card is discarded
after use. An example of this type of electronic
purse is the BT phone card. On the other hand,
the reusable type is a smart card which can be pre-
loaded with any amount of electronic cash up to a
certain limit. The card can also be replenished
each time the electronic cash is used up. An
example of this type of electronic purse is the
Mondex card.
Unlike the use of electronic cash, normally pre-
paid, the use of electronic credits and debits invol-
ving directly crediting and debiting the
card-holder's account requires a process of on-line
authorisation — on-line authentication of the
validity of the card used and verification of the
identity of the card-holder at the point of sale —
in order to prevent fraud. On-line authorisation
involves the use of a communication network
which in most cases is very costly. In France,
authorisations cost the equivalent of 25 cents per
transaction, while the cost of fraud is 4 cents,
according to Jean Claude Hellequin, the Paris-
based head of Visa's smart card team.3 As such, it is
more cost effective for the banking industry to use
electronic cash which does not require on-line
authorisations.
In addition to cost considerations, electronic
cash is gaining popularity because it provides many
advantages. First, with electronic cash, the need to
carry cash to purchase goods or services is reduced,
which lessens the risk of crime involved in hand-
ling physical cash. The cash in a pocket or purse is
also vulnerable: it can be used by anyone, the
rightful owner or not. Further, since cash is not
needed in many transactions, there is less need to
use ATMs and hence fraud and crime at ATMs
become less likely.4
Secondly, as electronic cash has the capability of
taking cash and coins out of circulation, it would
reduce handling costs for banks and retailers. UK
banks,
for example, spend about £2.5bn a year on
processing cash and some studies put the cost to
the retailer at £2bn a year. This spending would
not be required with electronic cash, and can pro-
vide a substantial saving both for banks and retail-
ers.
Further, substituting cash with electronic cash
will allow banks to hold on to, and invest, 'money'
between the time that it is transacted and the time
in which it is cleared. That margin, called the float,
would allow the banks originating the electronic
purse value to produce returns which could be
high.
WHY SMART CARDS?
The smart card is defined5 as a portable data stor-
age device with intelligence and provisions for
Page 353
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