Smart cards 101: How they work, use cases, and more

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 is present even in mobile phones. 

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In this guide, you will learn what smart cards are, along with the following:

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What is a smart card?

A smart card, also called a chip or integrated circuit card, is a plastic card that contains a memory chip embedded within it. These cards include metal contacts electronically connecting the card's chip to a reader. Newer versions of smart cards are contactless, enabling data exchange with a tap of the card.

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Smart cards are used to verify identities, authenticate access, store data, and transfer payments. For instance, debit and credit cards are examples of smart cards we use on a daily basis to pay for groceries or to buy goods online. Virtual business cards are also examples of smart cards.

Important smart card trends

In 2019, the global smart card market was valued at about $10.19 Billion. It is expected to reach $15.57 Billion by 2027. This means that the market will grow at a CAGR of 6.2 percent from 2020-2027.

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The banking sector has 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. Thus, smart cards are powering a major payment channel, offering alternatives to popular ones such as ACH payments and EDI payments.

What do smart cards look like?

Smart cards usually have the following characteristics.

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• Dimensions: They are similarly sized as a credit card. Smart cards come in two sizes: The first is 85.60 by 53.98 millimeters, and the other one is 25 by 15 millimeters. Both are 0.76 millimeters thick.
• Material: Smart cards are primarily built of polyvinyl chloride. However, polyethylene-terephthalate-based polyesters, acrylonitrile butadiene styrene, or polycarbonate are also used. Simply put, your smart card will feel like plastic.
• Internal: Smart cards have various security systems, such as temper resistance to power features that securely interchange information.

How do smart cards work?

An external smart card reader powers a smart card. The smart card communicates with the card reader via an Radio Frequency Identification (RFID) chip or a Carrier Sensing Collision Detection (CSCD) system protocol.

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A serial interface exchanges data between the smart card and card reader. Here are some of the ways the two communicate:

• Physical contact
• RFID 
• Short-range wireless connectivity

The processor inside smart cards contains operating systems that perform various functions such as:

• Security
• Data Transmission
• Data storage

Examples of smart card usage

Smart cards are used extensively these days. They have been adopted in some manner by most industries, either for business or entertainment purposes. Here are a few examples:

• Financial industry: Smart cards function as payment cards and can be used at any payment terminal (or over the internet).

• Identity verification: Smart cards are used to authenticate identities—these cards are encrypted with the digital details of employees or citizens.

• Computer security: Smart cards can comply with security protocols, such as web browsers using them to store certificates for secure browsing.

• SIM cards: Cellular sim cards are miniature smart cards equipped with advanced technology.

A history of smart cards

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:

• 1995: First SIM cards launched
• 1999: First national eID card launched (Finland ID)
• 2003: Micro-SIM launched
• 2003: Chip and PIN cards begin to be issued in the United Kingdom.
• 2005: First International Civil Aviation Organization (ICAO) compliant electronic passport issued
• 2010: Smart credit cards arrive in the United States.
• 2012: Nano-SIM introduced
• 2018: First biometric contactless payment card and eSIM launched
• 2019: First 5G SIM launched
• 2021: First voice payment card launched

Smart card patents

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.

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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.

Early use in banking

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.

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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.

SIM cards and the rise of national IDs

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.

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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.

Smart passports

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.

2019 - current

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 percent of the smart card market in 2020. It increased to 50 percent of the total market less than a year later.

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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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Types of smart cards

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.

Contact and contactless cards

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.

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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

Hybrid cards are more technologically advanced than other types of smart cards. They are 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

Dual interface smart cards can be used in both contactless and contact-needy situations. These cards typically work with EMV readers but also contain NFC chips to transfer information. Most bank cards are dual interface cards.

Microprocessors

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.

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Pros and cons of smart cards

Smart cards offer several advantages but a few disadvantages too. Here they are in no particular order.

Pros of smart cards

• Security: Smart cards hold more authentication and account data than magnetic stripe cards, making them more secure. Unlike magnetic stripe cards, smart cards resist electronic interference and magnetic fields.

• Large and impenetrable memory: Smart cards provide tamper-resistant memory ideal for storing confidential data.

• Prevent fraud: Smart cards reduce fraud and theft by securely storing sensitive data. Unlike magnetic strip cards, malicious actors cannot easily replicate or read smart card data.

Cons of smart cards

• Weak durability: The chip embedded in a plastic or paper card can bend, causing damage. Cards are often carried in wallets or pockets, which increases the risk of damage due to pressure.

• Possible risk of hacking: Smart cards aren’t theft-proof. Hardware hacking is possible with physical access to the card.

• High cost and weak compatibility: Most smart cards and card readers are relatively expensive. Moreover, they are also incompatible with some smart chip card software. Several smart cards utilize patented software that is incompatible with other readers.

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How Ramp's smart cards simplify corporate expense management

Block and restrict spending minutely

Ramp's card lets you designate spend limits per vendor, employee, department, or category. The result is minute control over your expenses.

Centralized card management

Ramp helps you manage thousands of company cards in a few clicks. TRamp’s platform stores  cards information, expense policies, and transaction data on a single platform, giving you in-depth visibility into expense trends.

Enforce expense policies automatically

Ramp helps you automate expense policies, saving you time. You can digitize your expense policies and design complex approval workflows, adding manual approvals at predetermined steps. 

Automated expense categorization

Ramp categorizes expenses automatically. An AI-powered engine matches receipts to expenses, automating expense reimbursement processes. The result is less time spent manually matching receipts and more time spent analyzing expense trends.

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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.

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