Smartcards are credit-card sized cards that contain a microprocessor, program ROM, and volatile and non-volatile memory. A card can store value (such as digital cash) or information (such as identify, medical conditions, etc) in its non-volatile memory. Because it has processing, it can authenticate the terminal (e.g. merchant or bank) with which it is communicating, unlike normal magnetic stripe cards.
The major topic of the lecture was discussing the obstacles to the adoption of smartcards in the US, based on the observation that they are more widely used in Europe. This provides a good case study of the numerous issues studied in this class.
It helps if the system insures privacy through whatever technical means available. However, the important issue is the user perception. If the user feels that the system may be tracking their transactions or location, this may be a deterrent. It was cited in class that current credit card systems track and sell transaction information. "Cookies" in WWW browsers was also cited as a violation of privacy, one which many users of the WWW may not even be aware of.
The financial institutions will be concerned about theft and fraud. They will be willing so accept some level of risks, as long as losses don't negate their profits.
The merchants will have to purchase new terminals, and financial institutions will have to develop a whole infrastructure (network, software, etc.) to support those terminals. Given the very nature of smartcards -- their interface is different from credit and debit cards -- it will not be possible to reuse or modify old terminals.
The benefits of smartcards must overcome these switching costs to attract the necessary investment.
The consumer will not participate until they can use their smartcard in many locations. The merchants will not participate until many consumers have smart cards. There is thus an externality which can likely be overcome only by a heavy investment up front by the financial institutions, possibly subsidizing both merchants and consumers.
Alternatively, this could be viewed as a infrastructure investment by some government entity, like the Minitel system in France.
Externality considerations dictate that there be a single standard for smartcard-to-terminal communications. This requires a standardization process, or alternatively a very large initial player to set a de facto standard.