This chapter is concerned with the challenges of smart cards as a system innovation in the banking industry. System innovation is the innovation which cannot be adequately introduced by a single entity and is likely to fail unless two or more parties collectively accept the innovation. The study aims to understand the network system nature of smart cards. The comparative study of previous bank card innovations (ATM/Cash cards, Credit cards, EFTPOS/Debit cards) suggests a collaborative approach to reduce the risk of competitive innovation in the case of smart cards. However, the current situation reflects the competition among the powerful players. Unless innovators in the smart card industry see the benefits of collaboration, the diffusion of smart cards may not happen. Innovators may use an empirical analysis in this chapter to define strategic approach for their plan to compete in the smart card industry.