A smart card is a card that is embedded with either a microprocessor and a memory chip (IC card like ACS AC0S1) or only a memory chip with non-programmable logic (memory card like SLE smart cards). The IC card can add, delete, and otherwise manipulate information on the card, while a memory-chip card (for example, pre-paid phone cards) can only undertake a pre-defined operation.

Smart cards are much more popular in Europe than in the U.S. In Europe the health insurance and banking industries use smart cards extensively. Every German citizen has a smart card for health insurance. Even though smart cards have been around in their modern form for at least a decade, they are just starting to take off in the U.S.

Magnetic stripe technology remains in wide use in the U.S. However, the data on the stripe can easily be read, written, deleted or changed with off-the-shelf equipment. Therefore, the stripe is really not the best place to store sensitive information. To protect the consumer, businesses in the U.S. have invested in extensive online mainframe-based computer networks for verification and processing. In Europe, such an infrastructure did not develop and instead the card carries the intelligence. There are advantages and disadvantages to both systems.

The microprocessor on the smart card is there for security. The host computer and card reader actually "talk" to the microprocessor. The microprocessor enforces access to the data on the card. If the host computer read and wrote the smart card's random access memory (RAM), it would be no different than a diskette.

Smarts cards may have up to 1 Kbytes of RAM, 16 Kbytes of programmable read only memory, 24 Kbytes of read only memory (ROM), with an 8-bit microprocessor running at 5 MHz. The smart card uses a serial interface and receives its power from external sources like a card reader. The processor uses a limited instruction set for applications such as cryptography.

The most common smart card applications are:

• Credit cards
• Electronic cash
• Computer security systems
• Wireless communication
• Loyalty systems, like frequent flyer points
• Banking
• Satellite TV
• Government identification

Smart cards can be used with a smart card reader attachment to a personal computer to authenticate a user. Web browsers too, can use smart card technology to supplement Secure Sockets Layer (SSL) for improved security of Internet transactions. The recent American Express Online Wallet shows how online purchases work using a smart card and a PC equipped with a smart card reader. Smart card readers can also be found in mobile phones and vending machines.

Smart cards, unlike magnetic stripe cards, can carry all necessary functions and information on the card. Therefore, they do not require access to remote databases at the time of the transaction.

Today, there are three categories of smart cards, all of which are evolving rapidly into new markets and applications:

• Integrated Circuit (IC) Microprocessor Cards. Microprocessor cards (also generally referred to by the industry as "chip cards" or "IC cards") offer greater memory storage and security of data than a traditional mag stripe card. Smart cards that are chip cards or IC cards also can process data on the card. The current generation of chip cards has an eight-bit processor, 16KB read-only memory, and 512 bytes of random-access memory. This gives them the equivalent processing power of the original IBM-XT computer, albeit with slightly less memory capacity.

  These smart cards are used for a variety applications, especially those that have cryptography built in, which requires manipulation of large numbers. Thus, chip cards have been the main platform for cards that hold a secure digital identity. Some examples of these cards are:
   

  • Cards that hold money ("stored value cards")
  • Card that hold money equivalents (for example, "affinity cards)
  • Cards that provide secure access to a network
  • Cards that secure cellular phones from fraud
  • Cards that allow set-top boxes on televisions to remain secure from piracy
     
• Integrated Circuit (IC) Memory Cards. IC memory cards can hold up to 1-64 KB of data, but have no processor on the card with which to manipulate that data. Thus, they are dependent on the smart card reader (also known as the card-accepting device) for their processing and are suitable for uses where the card performs a fixed operation.

  Memory cards represent the bulk of the 600 million smart cards sold last year, primarily for pre-paid, disposable-card applications like pre-paid phone cards. Memory cards are popular high-security alternatives to mag stripe cards.
   

• Optical Memory Cards. Optical memory cards look like a card with a piece of a CD glued on top - which is basically what they are. Optical memory cards can store up to 4 MB of data. But once written, the data can not be changed or removed. Thus, this type of card is ideal for record keeping - for example medical files, driving records, or travel histories. Today, these cards have no processor in them (although this is coming in the near future). While the cards are comparable in price to chip cards, the card readers use non-standard protocols and are expensive.

The first smart card was developed in 1974, by independent inventor Roland Moreno. Smart card use in Europe and Asia is outpacing North America, but smart card growth is expected to continue at a brisk pace.

By way of comparison, there are over 900 million credit cards in circulation today. Major uses will include providing enhanced financial services, increasing the security and flexibility of cellular phones, and securing satellite and cable transmissions in TV set-top boxes.