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Beyond
Payphones:
Vending, Low-value Transactions and the Smart Card Age
1998-2003
a market research report
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The convenience of credit cards and debit cards have virtually turned us into a cashless society, but there is still one cash cow: low-value transactions. Consumers have spent billions of dollars each year in small increments, fumbling for dimes, quarters, and dollar bills to pay for 35 cent phone calls or $2.50 highway tolls. While prepaid calling cards have obliterated the need for change at a payphone, they can’t be used at a tollbooth, nor can they buy a tank of gas or a vending machine soda. But a new generation of card will soon be able to handle these small cash exchanges: the multifunctional smart card.
In the US, payphones are often collocated with vending machines or in transportation facilities where users often need to make other small cash purchases. Consumers are already comfortable with prepaid calling cards; the transition to a multifunctional smart card could be effortless. With deregulation requiring some payphone providers to upgrade their equipment, installing smart card capabilities now is a smart idea. It will decrease operating costs, reduce fraud, and perhaps lead the way for the widespread implementation of smart cards in other applications. Moreover, enabling smart card technology in payphones could transform the devices into next-generation telecom access terminals.
Beyond Payphones provides a comprehensive analysis of the exciting opportunities created by the merger of the prepaid calling card and the multifunctional smart card. The study discusses the pros and cons of various card technologies and examines the economics of market implementation. Strategic profiles of major card technology vendors, payphone suppliers, and service providers are included. The study concludes with five-year forecasts of smart card unit sales and revenue by application, region, and vendor.
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Report Excerpt
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Payphones in the Information Age
Dropping coins in a payphone will not open a gateway to
the information age--not yet. Most of the 2.1 million
payphone devices hung on walls at airports, convention
centers and convenience stores around the US are dumb
devices that have changed little in the past twenty
years. And they would probably have remained unchanged
were it not for the Telecom Reform Act of 1996.
The Act has already modified the entire economics of
public telephones. Before the Act, approximately 75
percent of all public telephones in the US were operated
by Local Exchange Companies (LECs) as part of the
universal service requirement, with the understanding
that any losses incurred from operating public telephones
could be offset with revenues from other services. Since
these phones were operated as a public service, the local
telephone companies had little motivation to upgrade
their equipment or provide other services that increase
profits.
By stripping away all existing subsidies and allowing
equal opportunities for service providers to compete for
payphone business, the once staid payphone market has
been radically altered. The LECs, with the bulk of the
installed payphone base, face a crucial decision: upgrade
the phones to generate real revenue or get out of the
business.
Insight's analysis suggests that the Act is going to work
like the magic wand waved over Cinderella's pumpkin,
transforming the phones into sleek new telecom access
terminals--and in the process just might change the very
nature of how low-value transactions are handled in the
information age.
Smart Cards in Telecommunications
Smart cards or stored value cards could be the route to
making a profit off of low-value transactions (defined by
this report as any financial transactions below $20). The
traditional payment method for low-value transactions has
been coins and small bills, used both with live vendors
or vending machines. Although the costs of implementing
new payment systems (such as smart cards) is often cited
as a factor standing in the way of wider implementation,
the cost of handling cash can be significant, especially
for low-value transactions. These costs include
transporting, counting, and safeguarding the cash, as
well as technology needs and opportunity costs (e.g.,
when there is not enough change to complete the desired
transaction).
There are costs associated with non-cash transactions,
including bank charges, credit card account charges, bad
debt costs, and credit agency clearing charges. These
costs can be acceptable for most buyers and sellers
because they are less than the costs associated with cash
transactions. Non-cash transactions can be preferred even
when inconvenient. For example, prepaid calling cards
have become popular in the US in the last few years, even
though customers are required to dial up to 20 digits to
access a dial-around network. Insight estimates that
prepaid calling revenues are already over $1 billion a
year.
For low-value transactions, smart cards have several
advantages over the relatively simple prepaid card. Smart
cards have on-board logic, the ability to process
commands or instructions and plenty of permanent and
volatile storage. This means that in addition to storing
customer profiles, the card can store monetary value
which can be electronically added and subtracted from a
balance maintained on the card itself, rather than in a
bank account or a credit card account.
If carriers are willing to seize the initiative, the
opportunity now exists to automate payphones with smart
card technology, and add features that will generate
additional revenue. Studies by Schlumberger, a large
electronic transactions company/payphone equipment
vendor, have shown that people in Europe using smart
cards spend more money on an average call than people
that do not use them.
And while our analysis suggests that a good business case
can be made for a system that uses the smart card format
with public telephones, an even better case can be made
for a multifunctional low-value payment system that
includes vending machines, transit fares, or even
Internet payments. Any low-value transaction could
potentially become an application of this card
technology.
In the US, no single company has the ability to
unilaterally implement a new smart card system, and it
appears that the Federal government is not going to take
a leadership position anytime soon. However, the Regional
Bell Operating Companies (RBOCs) today are in a special
position. Each of the remaining five RBOCs still have
substantial control of local calling markets, and most of
the RBOCs control more than 80 percent of the payphones
in their markets. Payphones are often collocated with
vending machines or in transportation facilities where
users have the opportunity or need to make other
low-value transactions. Thus, we believe that payphones
are the opening gamut in rolling out a multifunctional
smart card system in the US market.
The Worldwide Market
US independent payphone providers (IPPs) have grabbed
about 27 percent of the installed base by the end of
1997. Some LECs have suffered more erosion than others:
GTE and BellSouth suffered the greatest losses, while
Ameritech still holds the largest market share with
81.6%. Though the past several years' data shows that the
total payphone equipment market has grown only about .9%
per year, the general consensus among market participants
is that smart card technology will drive a much higher
rate of growth over the next few years.
Insight anticipates substantial adoption of smart cards
in US, and we expect to see a compound annual growth rate (CAGR) of more than 60 percent over the forecast period.
In Asia/Pacific we foresee a CAGR of more than 45 percent
over the forecast period since several major issuers have
already made a significant commitment to smart cards in
that region. Globally, we expect the smart card market to
grow from $1.1 billion in 1997 to about $2.8 billion by
2002, with prepaid phone cards representing about 35
percent of the market by the end of the forecast period.
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Market Segmentation
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- Smart Cards Sold
- Average Unit Sale
- Revenue
- Application
- Pay TV
- Transport
- Prepaid Phone
- GSM
- Financial
- Health
- ID/Security
- Vendor
- Gemplus
- Schlumberger/Soliac
- Giesecke & Devrient
- Bull CPS
- Orga Card Systems
- All Others
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Table of Contents
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Chapter I
EXECUTIVE SUMMARY
1.1 Payphones in the Information Age
1.2 Smart Cards in Telecommunications
1.3 The Worldwide Market
Chapter II
MARKET OVERVIEW
2.1 Background
2.2 E-Cash Systems
2.3 History of Smart Cards
2.4 The Developing World
2.5 Specialized vs. Multipurpose Applications
2.6 US Prospects for Smart Card Implementation
2.6.1 Fortuitous Changes in the Telecom Industry
2.6.2 Upgrading the Pay Telephone Equipment Base
2.6.3 Popularity of Prepaid Calling Cards
2.6.4 The Multipurpose Card
2.7 One Further Observation
Chapter III
THE CARD TECHNOLOGIES
3.1 A Technology That Has Been About to Happen for 20
Years
3.2 The Pros and Cons of Various Card Technologies
3.2.1 Embossed Cards
3.2.2 Magnetic Stripe Cards
3.2.3 Telephone Calling Cards
3.2.4 Bar Code Cards
3.2.5 Smart Cards
3.2.5.1 Hardware
3.2.5.2 Software & Java Programming
3.3 Status of Smart Cards in the US
3.3.1 The Level of Government Support
3.4 Current Applications of Smart Cards
3.4.1 Telecommunications
3.4.2 Financial Transactions
3.4.3 Satellite Television
3.4.4 Healthcare
3.4.5 Public Transit Fare Systems
3.4.6 Other Applications
3.5 Major Smart Card Programs Abroad
3.5.1 France: Widescale Smart Card Implementation
3.5.2 Finland's Innovative Role
3.5.3 Projects Underway in Eastern Europe
3.5.4 The Far East: The Largest Market?
3.6 Other Approaches to Low-Value Transactions
3.6.1 Cash
3.6.2 Multiple Trip Transit Tickets
3.6.3 Bridge, Tunnel and Highway Toll Systems
3.6.4 Capacitive Card Technology
3.6.5 US Prepaid Calling Cards
Chapter IV
CARDS AND TELECOMMUNICATIONS
4.1 Keys to Widescale Implementation in the US
4.1.1 Prepaid Calling Cards Pave the Way
4.1.2 Smart Cards' Value for Telecom Applications
4.1.3 The Pay Telephone Infrastructure in the US Today
4.1.3.1 Types of Payphones
4.1.3.2 Installed Base of Payphones in the US
4.1.4 Experience with Technology and Plans for Upgrades
4.2 The Telecommunications Act and Payphones
4.2.1 Section 276 Payphone Order
4.2.2 Nonstructural Safeguards
4.2.3 Monopoly Locations and Public Interest Payphones
4.2.4 Operator Service Provider Reform
4.3 The Economics of Market Implementation
4.3.1 Standards vs. Competition
4.3.2 The Need/Opportunity for Multi-Industry
Implementations
4.4 Has Wireless Usage Affected the Payphone Market?
4.4.1 Payphone Service Market Size
4.4.2 Wireless as a Competitor
4.4.3 Wireless as an Enabler
Chapter V
CARD TECHNOLOGY AND PAYPHONE EQUIPMENT VENDORS
5.1 Card Vendors and Card Reading Equipment
5.1.1 Groupe Bull
5.1.1.1 Marketing Strategy
5.1.1.2 Assessment and Forecast
5.1.2 Gemplus
5.1.2.1 Marketing Strategy
5.1.2.2 Assessment and Forecast
5.1.3 Hewlett-Packard Company/Verifone
5.1.4 Motorola
5.1.5 Giesecke & Devrient (G&D)
5.1.5.1 Marketing Strategy
5.1.5.2 Assessment and Forecast
5.1.6 Orga
5.1.6.1 Marketing Strategy
5.1.6.2 Assessment and Forecast
5.1.7 Schlumberger Smart Cards & Systems
5.1.7.1 Marketing Strategy
5.1.7.2 Assessment and Forecast
5.2 Payphone Manufacturers
5.2.1 Elcotel Telecommunications Systems, Inc.
5.2.1.1 Marketing Strategy
5.2.1.2 Assessment and Forecast
5.2.2 Intellicall, Inc.
5.2.2.1 Marketing Strategy
5.2.2.2 Assessment and Forecast
5.2.3 Lucent Technologies
5.2.3.1 Marketing Strategy
5.2.3.2 Assessment and Forecast
5.2.4 Nortel
5.2.4.1 Marketing Strategy
5.2.4.2 Assessment and Forecast
5.2.5 Protel
5.2.5.1 Marketing Strategy
5.2.5.2 Assessment and Forecast
5.2.6 Quadrum Telecom
5.2.7 Schlumberger Tech. Inc.
5.2.7.1 Marketing Strategy
5.2.7.2 Assessment and Forecast
5.3 Potential New Market Entrants
Chapter VI
MAJOR SERVICE PROVIDERS
6.1 Banksys
6.1.1 Marketing Strategy
6.1.2 Assessment and Forecast
6.2 GE Capital Services
6.3 MasterCard
6.3.1 Marketing Strategy
6.3.2 Assessment and Forecast
6.4 Visa International
6.4.1 Marketing Strategy
6.4.2 Assessment and Forecast
Chapter VII
WORLDWIDE MARKET PROJECTIONS
7.1 Some Comments About the Numbers
7.2 Forecasted Worldwide Smart Card Sales by Application
7.3 Forecasted Worldwide Smart Card Sales by Region
7.4 The US Smart Card Market
7.4.1 Probable Demand Drivers
7.4.2 One-Time Special Opportunity
7.5 Forecasted Worldwide Smart Card Sales by Vendor
7.6 Worldwide Revenue from Smart Card Sales
7.7 Market Needs Will Govern the Rate of Change
7.8 Smart Cards over the Internet
7.9 The Changing Environment
7.10 US Companies Will "Sell" Smart Cards to
Users
APPENDIX
Table of Figures
Chapter I
I-1 The Costs of Cash
I-2 Installed US Payphone Base, Telco vs. IPP Owned, 1997
I-3 Smart Card Sales by Region, 1997 and 2002 (Millions
of Cards)
Chapter II
II-1 Traditional vs. Smart Card Phones
Chapter III
III-1 Standard Card Format
III-2 Worldwide Smart Card Sales by Application, 1997
III-3 The Costs of Cash
Chapter IV
IV-1 A Typical GSM Card
IV-2 Installed US Payphone Base, Telco vs. IPP Owned,
1997
IV-3 US Payphones by Region, 1997
IV-4 Manufacturing and Delivery Costs of Magnetic,
Memory-only and Microprocessor Cards
IV-5 The Changing Payphone Service Market, 1992-1996
($Millions)
Chapter V
V-1 Schlumberger's Cyberflex Architecture
V-2 Smart Card Manufacturers' Estimated Market Shares,
1997 and 2002
Chapter VII
VII-1 Worldwide Smart Card Sales by Application, 1997
VII-2 Worldwide Smart Card Sales by Application, 2002
VII-3 Smart Card Sales by Region, 1997 and 2002 (Millions
of Units)
VII-4 Smart Card Sales in North America by Application,
2002
VII-5 Average Price per Smart Card, 1996-2002
Table of Tables
Chapter III
III-1 Advantages and Disadvantages of Various Card
Technologies
III-2 Industry Applications of Smart Cards
Chapter IV
IV-1 Factors of Prepaid Cards' Success in the US
IV-2 Different Types of Payphones
IV-3 Total Number of Payphones, IPP vs. LECs, by Region,
1997
IV-4 Growth in US Installed Base of Payphones by Region,
1995-1998
IV-5 Installed Base by Region by Vendor, 1997
IV-6 Advantages/Disadvantages of Installing Card-based
Payphones
IV-7 Smart Card Cost/Benefit Analysis, Typical Payphone
Application
IV-8 Payphone Service Revenue, 1992-1996 ($Millions)
Chapter V
V-1 Smart Card Manufacturer Differentiating Factors
V-2 Payphone Manufacturer Differentiating Factors
Chapter VI
VI-1 Service Provider Differentiating Factors
Chapter VII
VII-1 Worldwide Smart Card Growth by Application,
1997-2002 (Millions of Units)
VII-2 North American Smart Card Sales by Application,
1997-2002 (Millions of Units)
VII-3 Estimated Smart Card Sales by Vendor, 1997-2002
(Millions of Units)
VII-4 Smart Cards Sold, Average Unit Sale, and Revenue,
1996-2002 (Millions, except Unit Sales)
VII-5 Worldwide Smart Card Sales Revenue by Application,
1997-2002 ($Millions)
VII-6 Worldwide Smart Card Sales Revenue by Region,
1997-2002 ($Millions)
VII-7 Worldwide Smart Card Sales Revenue by Vendor,
1997-2002 ($Millions)
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