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The proliferation of plastic cards started in the USA in the early 1950s. The low price of the synthetic material PVC made it possible to produce robust,  durable plastic cards that were much more suitable for everyday use than the paper and cardboard cards previously used, which could not adequately withstand  mechanical stresses and climatic effects.

The first all-plastic payment card for general use was issued by the Diners Club in 1950. It was intended for an exclusive class of individual, and thus also  served as a status symbol, allowing the holder to pay with his or her ‘good name’ instead of cash. Initially, only the more select restaurants and hotels  accepted these cards, so this type of card came to be known as a ‘travel and entertainment’ card.

The entry of Visa and MasterCard into the field led to a very rapid proliferation of ‘plastic money’ in the form of credit cards. This occurred first in  the USA, with Europe and the rest of the world following a few years later. Today, credit cards allow travelers to shop without cash everywhere in the world.  A cardholder is never at a loss for means of payment, yet he or she avoids exposure to the risk of loss due to theft or other unpredictable hazards,  particularly while traveling. Using a credit card also eliminates the tedious task of exchanging currency when traveling abroad. These unique advantages  helped credit cards become rapidly established throughout the world. Many hundreds of millions of cards are produced and issued annually.

At first, the functions of these cards were quite simple. They served as data storage media that were secure against forgery and tampering. General  information, such as the card issuer’s name, was printed on the surface, while personal data elements, such as the cardholder’s name and the card number,  were embossed. Many cards also had a signature panel where the cardholder could sign his or her name for reference. In these first-generation cards,  protection against forgerywas provided by visual features, such as security printing and the signature panel. Consequently, the system’s security depended  quite fundamentally on the quality and conscientiousness of the persons responsible for accepting the cards. However, this did not represent an overwhelming problem, due to the card’s initial exclusivity. With the increasing proliferation of card use, these rather rudimentary features no longer proved ufficient,  particularly since threats from organized criminals were growing apace.

Increasing handling costs for merchants and banks made a machine-readable card necessary, while at the same time, losses suffered by card issuers as the  result of customer insolvency and fraud grew from year to year. It became apparent that the security features for protection against fraud and manipulation,  as well as the basic functions of the card, had to be expanded and improved.

The first improvement consisted of a magnetic stripe on the back of the card, which allowed digital data to be stored on the card in machine-readable form as  a supplement to the visual information. This made it possible to minimize the use of paper receipts, which were previously essential, although the customer’ s signature on a paper receipt was still required in traditional credit card applications as a form of personal identification. However, new approaches that  did not require paper receipts could also be devised. This made it possible to finally achieve the long-standing objective of replacing paper-based  transactions by electronic data processing. This required a different method to be used for user identification, which previously employed the user’s  signature. The method that has come into widespread general use involves a secret personal identification number (PIN) that is compared with a reference  number. The reader is surely familiar with this method from using bank machines (automated teller machines). Embossed cards with magnetic stripes are still  the most commonly used types of cards for financial transactions.

However, magnetic-stripe technology has a crucial weakness, which is that the data stored on the stripe can be read, deleted and rewritten at will by anyone  with access to the necessary equipment. It is thus unsuitable for storing confidential data. Additional techniques must be used to ensure confidentiality of  the data and prevent manipulation of the data. For example, the reference value for the PIN could be stored in the terminal or host system in a secure  environment, instead of on the magnetic stripe. Most systems that employ magnetic-stripe cards thus use online connections to the system’s host computer for  reasons of security, even though this generates significant costs for the necessary data transmissions. In order to reduce costs, it is necessary to find  solutions that allow card transactions to be executed offline without endangering the security of the system.

The development of the smart card, combined with the expansion of electronic dataprocessing systems, has created completely new possibilities for devising  such solutions. Enormous progress in microelectronics in the 1970s made it possible to integrate data storage and processing logic on a single silicon chip  measuring a few square millimetres. The idea of incorporating such an integrated circuit into an identification card was contained in a patent application  filed by the German inventors J¨urgen Dethloff and Helmut Gr¨otrupp as early as 1968. This was followed in 1970 by a similar patent application by Kunitaka  Arimura in Japan. However, the first real progress in the development of smart cards came when Roland Moreno registered his smart card patents in France in  1974. It was only then that the semiconductor industry was able to supply the necessary integrated circuits at acceptable prices. Nevertheless, many  technical problems still had to be solved before the first prototypes, some of which contained several integrated circuit chips, could be transformed into  reliable products that could be manufactured in large numbers with adequate quality at a reasonable cost. Since the basic inventions in smart card technology  originated in Germany and France, it is not surprising that these countries played the leading roles in the development and marketing of smart cards.
The great breakthrough was achieved in 1984, when the French PTT (postal and telecommunications services agency) successfully carried out a field trial with  telephone cards. In this field trial, smart cards immediately proved to meet all expectations with regard to high reliability and protection against  manipulation. Significantly, this breakthrough for smart cards did not come in an area where traditional cards were already used, but in a new application.Introducing a new technology in a new application has the great advantage that compatibility with existing systems does not have to be taken into account, so  the capabilities of the new technology can be fully exploited.

A pilot project was conducted in Germany in 1984–85, using telephone cards based on several technologies. Magnetic-stripe cards, optical-storage  (holographic) cards and smart cards were used in comparative tests. Smart cards proved to be the winners in this pilot study. In addition to a high degree of  reliability and security against manipulation, smart card technology promised the greatest degree of flexibility for future applications. Although the older  but less expensive EPROM technology was used in the French telephone card chips, more recent EEPROMchips were used from the start in the German telephone  cards. The latter type of chip does not need an external programming voltage. An unfortunate consequence is that the French and German telephone cards are  mutually incompatible. It appears that even after the introduction of the euro, French and German telephone cards will remain unusable in each other’s  country of origin for at least a while.

Further developments followed the successful trials of telephone cards, first in France and then in Germany, with breathtaking speed. By 1986, several  million ‘smart’telephone cards were in circulation in France alone. The total rose to nearly 60 million in 1990, and to several hundred million worldwide  in 1997. Germany experienced similar progress, with a time lag of about three years. These systems were marketed throughout the world after the successful introduction of the smart card public telephone in France and Germany. Telephone cards incorporating chips are currently used in more than 50 countries.

The integrated circuits used in telephone cards are relatively small, simple and inexpensive memory chips with specific security logic that allows the card  balance to be reduced while protecting it against manipulation. Microprocessor chips, which are significantly larger and more complex, were first used in  large numbers in telecommunications applications, specifically for mobile telecommunications. In 1988, the German Post Office acted as a pioneer in this area by introducing a modern microprocessor card using EEPROMtechnology as an authorization card for the analog mobile telephone network (C-Netz). The reason  for introducing such cards was an increasing incidence of fraud with the magnetic-stripe cards used up to that time. For technical reasons, the analog mobile  telephone network was limited to a relatively small number of subscribers (around one million), so it was not a true mass market for microprocessor
cards. However, the positive experience gained from using smart cards in the analog mobile telephone systemwas decisive for the introduction of smart cards  into the digitalGSMnetwork. This network was put into service in 1991 in various European countries and has presently expanded over the entire world, with  over 600 million subscribers in more than 170 countries. Progress was significantly slower in the field of bank cards, in part due to their greater  complexity compared with telephone cards. These differences are described in detail in the following chapters. Here we would just like to remark that the  development of modern cryptography has been just as crucial for the proliferation of bank cards as developments in semiconductor technology.

With the general expansion of electronic data processing in the 1960s, the discipline of cryptography experienced a sort of quantum leap. Modern hardware and  software made it possible to implement complex, sophisticated mathematical algorithms that allowed previously unparalleled levels of security to be achieved.  Moreover, this new technology was available to everyone, in contrast to the previous situation in which cryptography was a covert science in the private  reserve of the military and secret services. With these modern cryptographic procedures, the strength of the security mechanisms in electronic dataprocessing  systems could be mathematically calculated. It was no longer necessary to rely on a highly subjective assessment of conventional techniques, whose security  essentially rests on the secrecy of the procedures used.

The smart card proved to be an ideal medium. It made a high level of security (based on cryptography) available to everyone, since it could safely store  secret keys and execute cryptographic algorithms. In addition, smart cards are so small and easy to handle that they can be carried and used everywhere by  everybody in everyday life. It was a natural idea to attempt to use these new security features for bank cards, in order to come to grips with the
security risks arising from the increasing use of magnetic-stripe cards.

The French banks were the first to introduce this fascinating technology in 1984, following a trial with 60,000 cards in 1982–83. It took another 10 years  before all French bank cards incorporated chips. In Germany, the first field trials took place in 1984–85, using a multifunctional payment card  incorporating a chip. However, the Zentrale Kreditausschuss (ZKA), which is the coordinating committee of the leading German banks, did not manage to issue a
specification for multifunctional Eurocheque cards incorporating chips until 1996. In 1997, all German savings associations and many banks issued the new  smart cards. In the previous year, multifunctional smart cards with POS functions, an electronic purse and optional value-added services were issued in all  of Austria. This made Austria the first country in the world to have a nationwide electronic purse system.

An important milestone for the future worldwide use of smart cards for making payments was the completion of the EMV specification, which was a product of  the joint efforts of Europay, MasterCard and Visa. The first version of this specification was published in 1994. It contained detailed descriptions of  credit cards incorporating microprocessor chips, and it guaranteed the mutual compatibility of the future smart cards of the three largest credit card
organizations.

Electronic purse systems have proven to be another major factor in promoting the international use of smart cards for financial transactions. The first such  system, called Danmønt, was put into operation in Denmark in 1992. There are currently more than 20 national systems in use in Europe alone, many of which  are based on the European EN 1546 standard. The use of such systems is also increasing outside of Europe. In the USA, where smart-card systems have had a hard time becoming established, Visa experimented with a smart-card purse during the 1996 Olympic Summer Games in Atlanta. Payments via the Internet  offer a new and promising application area for electronic purses. However, the problems associated with making small payments securely but anonymously  throughout the world via the public Internet have not yet been solved in a satisfactory manner. Smart cards could play a decisive role in providing an answer to these problems. Besides this, smart cards could plan an important role in introducing electronic signatures. Several European countries have  initiated the introduction of electronic signature systems after a legal basis for the use of electronic signatures was provided by approval of a European  directive regarding electronic signatures in 1999.

As the result of another application, almost every German citizen now possesses a smart card. When health insurance cards incorporating chips were  introduced, more than 70 million smart cards were issued to all persons enrolled in the national health insurance plan. Presently, smart cards are being used  in the health-care sector in many countries. The smart card’s high degree of functional flexibility, which even allows programs for new applications to be  added to a card already in use, has opened up completely new application areas extending beyond the boundaries of traditional card uses.

Smart cards are also being used as ‘electronic tickets’ for local public transport in many cities throughout the world. Contactless smart cards are usually  used for such applications, since they are particularly convenient and user friendly.