FB

Could you please provide us a little background regarding your involvement with biometrics?

F&S

Sure!  I'm with Frost & Sullivan and I am the lead research analyst for the Financial Services Group covering Automated ID and Security, and within that, of course, biometrics.  That is pretty much where I lead with Frost & Sullivan.  Professionally, because we are serving financial services clients, mainly the venture capital markets and the private equity companies, I have a background in investment banking. My knowledge comes from the people we are putting these studies out for because I pretty much know what they do and don't know about small emerging markets. So we are tailoring our product for that particular end user category, more so than the actual market participants.

FB

Can you tell us about the background of this study? Specifically, when it was executed and how many companies were involved?

F&S

The study has actually been in process from August 2005 - December 2005.  There were about 25 companies that participated.

FB

What were the key takeaways from your study?

F&S

The biggest thing that we saw is that almost all the companies that are putting out biometric applications are doing so in one realm.  That is really important for the financial services clients that we have, because that indicates that there is going to be a possibility for a lot of consolidation coming into the future. Please keep in mind that I will be approaching these answers from a financial services perspective.

FB

One of the points that you mentioned in the study was that multi-modal biometric verification really improves performance and yet 95% of market participants offer only one application.   What is your view on that?  Do you feel that this is going to be changing over the next several years?

F&S

Absolutely!  I think there is a lot of room for integration of multi-modal biometrics into one application.  A good example would be the electric physiological emissions that the body has while doing a fingerprint scan or vascular pattern recognition, which can be coupled with fingerprint technology. There are so many different ways you can combine biometrics and the more samples you can get at one time the more accuracy you are going to have. I think, again, that is really where that sector consolidation is going to come into play, where the financial services community at large is going to be able to have a good influence as to where the market goes.

FB

What would you say are the current major market drivers in North America and how would you say they have changed in the past two years?

F&S

Naturally the government is the main driver still at the national, local and regional levels, just because there is a lot of need for criminal and civil security services.  Also I think what has changed a little more is the perception of middle America. There is still a little bit of the impression that Biometrics is “big-brotherish”, but at the same time you can certainly see the shift of middle America towards the acceptance of Biometrics for such things as fraud reduction. I saw a statistic stating that, some time between 2005 and 2007, it is anticipated that there will be about 2 trillion dollars in financial fraud.  The end user says, “It is not going to be my identity theft... it is going to be somebody else's and if that means I go to a biometric point of sales system or a biometric ATM to make sure that I am safe, then I am going to accept that.” So I would say that the financial services community as end users are probably going to be the next adopters of biometrics.

FB

What would you say are the three greatest challenges facing the industry as we move into 2006?

F&S

One challenge, being addressed by the industry itself, is interoperability.  When a government or a large bank goes to buy a biometric or a health care services system, they are often working with a lot of small companies and they want to know that, if this company goes out of business, gets absorbed into another company or for some reason becomes unviable for whatever reason, their system is still going to be legitimate and they are not going to put a new one into place.  So the move of the industry toward interoperability is really helping solve what is probably one of the biggest challenges for the industry.

The second one is that there are not a lot of investment companies putting money into biometrics still, and there are a lot of great ideas out there, both for new technologies and for technologies that are currently generating revenue.  I guess the biggest VC right now is L-1 Partners and it is the only venture capital firm actually dedicated to biometrics at large.  And then of course there are a couple of other companies that are dealing with biometrics but not on a full throttle basis as needs to happen.

The third major challenge is the business model and this is more from an executive perspective. The business model is a lot of times kind of short-sighted right now. Companies are chasing contracts and trying to get that next big sale. I can see the reasons behind that and it is what a lot of small start-ups do, but to really come forward with a better business strategy is something that a lot of biometric companies need to look at.

FB

That is an excellent point and might I also suggest that perhaps the educational aspect that you mentioned in the earlier question might fit in there as a challenge as well?

F&S

That certainly is a challenge, and once again I have the rather dubious honour of trying to come at this market from a variety of different angles. So you are absolutely right, I would certainly say that the end-user adoption of middle North America is certainly a challenge and a significant one. However, I also think that, with IBM coming out with their TV commercials and educating their clients as to what a fingerprint password is, they are really helping move the educational process forward.

FB

That leads nicely into my next question Rob. What would you say are the three most significant events that occurred in 2005 for the Biometric Industry?

F&S

First, from my point of view, is the emergence of L-1 Partners.  Robert LaPenta has branched off to start L-1 Investment Partners, coming forward with this biometrics only” investment company. That is huge!  It really signifies that biometrics is here and is here to stay so I am definitely glad to see that.  

I also think that the visibility of biometrics in TV commercials and Newspaper ads like the ones from IBM are really helping the industry from an end user educational perspective.

People have this Hollywood perception of what biometrics can do and now the biometric companies are starting to say, “No, that's really not so accurate.  This is exactly how it really works”, and the industry is starting to feel a little better about it.

Finally, I think what is pretty impressive is that from my research, it seems that one company has become profitable within the past year and that is a big step.  Now that the industry has at least one that is starting to become profitable, it means that sooner or later the others are going to follow suit as their business models come along. To summarize, I feel that the three most significant events are the emergence of Financial Services firms dedicated to biometrics, the education of the end-user and the profitability of companies finally starting to take place.

FB

Were there any surprises that emerged from your -research?

RA

I wouldn't say surprises, but since we have had our briefing there have been probably 5 or 6 pretty major investment companies come back to us and say, “Hey we want to know more information!” and so, even though everyone supposedly has known that this is a growing market for the past 4 or 5 years it has grown really quickly without a lot of help. So just imagine what it will do when it is actually funded properly!

FB

What kind of future gazing can you put to the global biometric marketplace from this particular North American focused study?

F&S

That's a great question!  What we kind of did on the initial part of this is look at the market from a global level.  We initially thought of coming out with a global study and then we realised that it didn't make a lot of sense because the drivers in each of the geographic regions was significantly different. What we saw was that certain applications were really starting to make sense in particular regions. For example, in EMEA...Europe, Middle East and Africa, with the national ID programs that are coming out, there is a requirement for embedded fingerprint technology with a passport. I believe that the Kingdom of Saudi Arabia said that they want all of their national ID's to have an embedded biometric within the next 2 or 3 years. The national ID programs with biometrics, which are driven by the U.S. specific border crossing guidelines, are being adopted in the Middle East, Europe and Africa a little quicker than everybody else. This is driving that geographic market a little more, so you can see the growth of what I call the older biometrics - the fingerprint technologies - in that area. When I say new technologies, please keep in mind that that is from the perspective of the Financial Services community.  These firms really aren't aware of voice verification, signature verification, hand geometry - those sorts of biometrics.  They know fingerprints, whereas in Asia-Pacific the world is really a little bit different. There they are experimenting with more and better ideas for creating multi-modal biometrics. A major bank in Japan is putting vein pattern verification as well as fingerprint scanning into their ATM access and so what they are looking at is not so much the idea of civil and criminal security but more the idea of identity theft solutions.  So different global regions have particular interests in different biometrics, and while there is growth across the board in all of them certain things are drawing better in certain regions and in EMEA it seems to be more of the old standards of biometrics whereas in Asia-Pacific there seems to be more of the emergence.

FB

Besides government and law enforcement, which vertical do you see growth coming from and why is this happening now as opposed to before?

F&S

Financial Services, by that I mean the banks. Why now... because before, I think most banks did not put a lot of money into the market place after the 2001 attacks in the U.S.  It decreased a lot of capital spending. Also biometrics in general are decreasing in price, reliability has gone up, the conversion from non-interoperable to interoperable standards  - those are the things that are driving the financial services community to adopt technology at large.   I know that a lot of the Financial Services community is considering putting voice verification biometrics into their 1-800 dial in - so that way you have to say a dynamic phrase every time you call in and they have a reliability ratio of how accurate you are.  

The other growth market is consumer electronics. Biometrics are being embedded into phones for password protection, the same with computers. Those types of security access features, in place of your PIN numbers or your password would actually be your finger scan with your computer, with your cell phone or at the ATM machine.  

Finally the Healthcare market is trying to figure out how to incorporate biometrics to help keep track of patients as well as keeping track of patient records. So those are the three big ones, the Financial Services first, followed by consumer electronics and then healthcare to a smaller extent.

FB

Can you see the smart card industry and the biometrics market converging or do you believe that they will remain separate?

F&S

I don't think there is any way they can remain separate.  Interesting enough I have been doing a side project looking at mobile payment applications. We were looking specifically at the contactless market and what was really an interesting technology is were the smart cards are embedding biometrics on the card and then when you present the card it enables a one-to-one verification that way.  Really that seems to be the consumer's primary choice when having a smart card because they know that in that way the biometric is always with them. There is no chance that it is embedded in a computer databased host system somewhere. Rather, they themselves are controlling where the card is at all times.  I think this is the next level of security, biometrics are going to replace PIN and passwords on ATM machines and computers.  Then it is relevant also to embed them on smart cards and put them out there in the market and put them in the consumer's wallet or purse as just that next advance in identity safety.

FB

Do you see that as occurring in the next three years or is that further down the road?

F&S

It really depends. North America is really slow in adopting these technologies, which is really strange because a lot of the time we lead in the invention of these new technologies.  In EMEA and Asia-Pacific, they have the EMV smart card, which is Europay, MasterCard, Visa and now I think JCB has joined into that.  They are really working on getting consumers this type of biometric product and consumers seem a lot more willing, especially in Asia-Pacific, to start moving toward that so I think you will see a lot of adoption, again, in Asia-Pacific first, followed by Europe and then finally in North America and so that Asia-Pacific adoption I can certainly say would happen over a 3 year time span.  I think in the European adoption you are probably on a 3-5 year time line and unfortunately in North America you are on a decade time line, and that is because we are so isolated and insulated.  

FB

You mentioned in your study that vendors would be moving up the food chain to compete with the traditional large companies that are not a “pure play biometric company”.  What do you believe it takes for a “pure play” company to be successful in the migration and what have the traditional companies done that a pure play company might take advantage of?

F&S

For “pure play” companies to move up the food chain they need to understand not just the technology behind their biometrics but the way their end users do business.  And that's where your software companies and your conglomerates that are licensing these technologies right now are having some advantages because they have done systems integration before or they have done bidding before with large corporates or with large governments and they understand the process and they know that the process is going to take a long period of time to get put into place. So for a “pure play” to move up that food chain they need to become comfortable with deriving revenue from a long drawn out process, but what that means initially is that they have to have revenue coming from legacy instalments, for example updating technologies on people they have already implemented biometrics for. That is the chicken and egg question... which one is coming first.  But I think for the biometric companies, for the “pure plays” to move up that food chain they really have to understand their end users.

FB

Well thank you very much.  I appreciate you taking the time to speak with us.

F&S

It has been my pleasure Peter.

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