Thoughts about Smart Card Industry in Brazil: the Profitability challenge Smart Cards industry is now facing the great challenge of being profitable. In order to better understand this issue, we must go back in time for a few years and we will find several mistakes made that time that would impact the results nowadays. By the other hand, we also can take them as huge opportunities for the future. Late 90’s the major smart card manufacturers arrived in Brazil ( Bull CP8 , Schlumberger , Gemplus, G&D and Oberthur) aiming to gain this important market . First they opted for acquisitions or partnership with local mag stripe cards manufacturers or graphics industry players. Widely used in Europe mainly for banking, telco and Security ID applications, the smart card or chip card was patented by BULL CP8 in 1978 , and since then it has been used in several different everyday life sectors and continues to grow Early 2000’s with the arrival of GSM technology and large telco companies, Brazil became one of the most important markets for manufacturers worldwide. In the same period , VISA and MasterCard began to encourage migration from the traditional magnetic card to EMV Smart Card due to the technological upgrade involved in this migration, specially when talking about SECURITY. The banking EMV Chip Card represented a definitive solution to fraud (Skimming) by presenting technological solutions not feasible to be implemented in traditional magnetic cards, and additionally offering the opportunity to add value to this payment method. As an analogy, the magnetic card is nothing more than a data storage device (Diskette, CD , DVD or USB flash disk , for example) and it depends on the communication with a central computer to make a decision for each transaction. The chip card can be programmed for several different decision levels together with the reading terminal (POS, PIN PAD, ATM, etc.) with no need of communication for each transaction. There is no doubt that this “new” technology brought a significant upgrade for the mobile and credit/debit payment cards environment. With the perspective of thousand millions cards to be issued in Brazil, this market seemed to offer excellent gains promises, beyond any standard or optimistic sales forecast . As a reference, there are currently over 200 million mobile phones and more than 400 million banking cards issued in the country, meaning one chip card produced for each card. That was the right time to invest in secure plants building, personnel training and equipment importation processes focusing on producing smart cards. Market in Brazil became a true el dorado of this technology. Nowadays, there are a few important questions to be considered: Why are the manufacturers seeking for cost reductions and better management in order not to go on a negative balance? Why is so difficult, almost non reachable for sales teams to deliver acceptable numbers? Why is the factory’s Director life so hard? Let’s go through a couple of events that will help us understand this environment. Basically the smart card industry was focused on three main products: GSM, EMV Banking and transport. The first movement was to be prepared for banking market due to the expected EMV chip migration pushed by VISA and MasterCard, reflecting on attractive prices promises - above USD 3.00 per card. Unfortunately it was not exactly what happened, as Brazilian market has specific features and timings, different from European example that they should be following. Some details were not considered: - None of the issuing Banks had enough knowledge of Smart Card technology in order to evaluate the technologic impacts of the migration costs; - The acquiring and issuing systems were not least prepared to go on such migration in terms of requested investments; - What should be the drivers to change from a magnetic card , which costs a few cents , to another card that costs a few dollars ? - Who will be the first to start using the new technology? The demand didn’t happen at the expected time and some years were lost. The players kept seeking for answers , discussing possibilities and trying to find arguments to justify the reason why for the migration and mainly… who would pay the bill of the migration impact. Meanwhile the GSM market exploded and became the star of this industry. The mobile phone was no longer considered a simple “object of desire”, but a “must have”. The future of Banking Smart Card Market was still not defined. An EMV committee was founded in Brazil with the objective of discussing approved standards and Brazilian specific requests. Some issuers started analyzing the possibility of development their own operational system for the EMV chip cards. Kind of “reinventing the wheel”, but fortunately it didn’t succeed , otherwise the whole industry would still be waiting for the chip migration The skimming rate increased reaching almost unacceptable levels and finally the market found the real Sponsor for chip card migration , even considering the expensive costs and production difficulties involved in the process. VISA and MasterCard started to pressure down the prices due to their own interests , encouraging the implementation of alternative technologies that enabled local manufacturers with small infrastructure to start in the market without any significant investment. Nowadays we can find at least nine Smart Card vendors in the market. The reflect was that the old commercial teams coming from the graphic industry with no smart card technology knowledge were responsible to convert this product into a commodity . Direct effect was prices and profitability margins came down . In parallel , GSM smart cards were still offering great margins . The whole industry went into a “low price” game. Big vendors accepted the rules and forgot about the possibilities to add value to the product. Small vendors continued to be competitive based on their low production costs. From 2006 to 2010 Banking card issuers migrated the major part of their cards database and the smart cards industry was facing good moments ,event with still low margins. GSM smart cards market started to slow down and the number of orders decreased . At this time, the eyes of the industry changed the focus to ID segment ( personal identification, passport, drivers license) , once the revenue requested was difficult to be reached. The ID segment has a single customer, the government, and it means hard time for smart card industry in the next upcoming two or three years , mainly for the big multinational vendors not willing to be in the middle of political lobby agreements So, how can we face the challenge of being profitable and survive in this environment? CEO’s must be creative and look for new applications that can add value to the business. ID and automotive sectors are just alternatives, but the big vendors that have all the technology must be determined and use it aiming a successful future. The second wave of EMV chip migration is also an opportunity. As previously mentioned, the high level of fraud sponsored the chip migration , but by the other hand , the market went into a commoditization , making the issuers lives very easy. In the end of the day the consumer was the big looser, as he couldn’t take advantage of the benefits that this technology offers. Nowadays the consumers are more demanding about special attention. Unique segmented offers are more than welcome and it is mandatory to retain their loyalty. Add value to the banking smart card will be a great business following the successful example of what happened in France. Hopefully the industry will have a different driver that will avoid bad influences of low price game . Well prepared companies will win. Smart Card is a great product with huge added value possibilities. Definitely can’t be treated as a simple commodity.
Posted on: Wed, 30 Oct 2013 13:38:57 +0000
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