Contactless:
The New 'Wave' In Payments
BY KAREN EPPER HOFFMAN
For years a gas station novelty,
contactless payment cards and tokens are quickly catching on as major issuers
begin putting them in consumers' hands and driving merchant acceptance.
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SYNOPSIS | Making purchases
with the quick wave of a card - rather than a swipe - is becoming a
reality as a slew of major issuers and merchants throw their support
behind contactless payment. JPMorgan Chase & Co., American Express Co.,
KeyCorp, Citigroup and HSBC Bank USA have started to issue either cards
or tokens with radio frequency identification (RFID) chips that include
payment information, expecting the convenience of this technology to
win them greater loyalty from multiple card-using customers. Their
hopes are that this fast form of payment will speed checkout lines
and increase trans-action values, in spite of some security experts' concerns about remote access to the chips.
Contactless cards are fast becoming the new "wave" in
payments. In the past year, a host of heavyweight card issuers have introduced
a credit card that can be waved in front of an acceptance device, rather than
swiped, in order to make a purchase.
This payment mechanism is not new. It has been used in the
gasoline retailing industry for several years now, ExxonMobil's "Speedpass"
being a prominent example. What is new is the heightened interest shown by
the financial services industry and major retailers. To merchants, contactless
payment's appeal is its ability to speed purchasing and possibly even increase
the average value of each purchase. Issuers expect its convenience will cause
their customers to favor it over the other cards they hold.
JPMorgan Chase & Co., American Express Co., KeyCorp, Citigroup Inc.
and HSBC Bank USA are among the issuers that have announced plans to roll out credit
cards, debit cards or key-fob tokens containing contactless payment chips to millions
of U.S. customers. Retailers gearing up to install contactless readers include convenience
supercenters like Meijer Stores in the Midwest.
Contactless payment is typically aimed at consumers making purchases
for less than $25; a signature is usually required for transactions of greater value.
But in spite of the focus on low-value payments, merchants of varying stripes see enough
of a business case to offset the cost of new readers and employee education.
There are potential drawbacks, however, particularly involving security. The contactless card is driven by radio frequency
identification (RFID) technology, which allows the card's chip to be "read" by the scanning
device without coming into physical contact with that device. Some security experts worry
about the potential for cyber-crooks to collect the financial information stored on the
card by hacking the RFID component from a distance without the cardholder's knowledge.
Issuers and vendors respond that they have implemented strong
encryption and other security precautions that significantly limit any potential harm
from would-be fraudsters.
A more generalized concern has to do with the previous failure of chip cards, also known as "smart cards," to gain traction in the U.S. market, which overwhelmingly favors cards that use magnetic stripes. Contactless card advocates point to the building support from merchants and issuers alike in arguing that this time will be different. To bolster their case, they cite the success of recent contactless payment pilots in Orlando, Fla., and Phoenix, Ariz., as well as the growing popularity of RFID for other business applications like inventory tracking.
Make Payment, No Contact
Contactless payment first made its mark in 1997 with ExxonMobil Speedpass, a keychain RFID token that consumers can use to make quick payments at the pump. Many U.S. states also offer RFID-based devices to commuters as a means of paying highway tolls without stopping. But use of the technology was confined to such niche applications until now.
“What's changed is that now we’re seeing a unified approach by the industry that was previously lacking,” says Aaron McPherson, research director for payments for Financial Insights, an IDC company, based in Framingham, Mass.
McPherson adds that most pro-contactless banks believe the convenience of this new payment technology will make consumers use it more, enabling issuing banks to earn more on interchange fees. “In an environment where the growth of credit card transactions is only about 5% or 6%, it’s very difficult and expensive to get new cardholders. So the principal goal is retaining customers and getting them to use their cards more.”
MasterCard, for example, reported a 28% spike in weekly transaction volume among its PayPass cardholders in 2003, compared with the previous year when that capability wasn't available.
According to the card association’s findings, the merchants benefit from more frequent usage as well: in the 2003 pilot, PayPass merchants saw a 12% increase, month over month, in the volume of their transactions.
Eager to move the market along, card issuers, along with Visa and MasterCard, have helped nudge along merchants in key categories. "Issuers and associations have both been extremely helpful in the development of this service in terms of resource management as well as providing customers with incentives to enroll," says Mike DeAngelis, corporate communications manager for CVS, one of the first major convenience store chains to accept contactless payment. He declines to specify what subsidies or other resources the issuers and card associations may have offered.
Merchant Acceptance
With major issuers strongly backing the technology, industry experts forecast a sharp uptake in the use of contactless cards. Patrick Gauthier, senior vice president of emerging product development for Visa USA in San Francisco, Calif., believes the number of cards or devices in circulation in the U.S. could reach 50 million by the end of next year, compared to industry estimates of about 4 million.
In contrast to what occurred with the introduction of chip or “smart” cards, supporters are determined not to strand contactless card users. Based on Visa's forecast, Gauthier thinks that as many as 35,000 merchant locations, representing 200,000 point-of-sale terminals, will accept contactless payment by the end of 2006.
“With the number of false starts for smart cards, issuers and merchants were somewhat hesitant about jumping on the bandwagon for contactless cards,” says Randy Vanderhoof, executive director of the Princeton Junction, N.J.-based Smart Card Alliance. The alliance in August announced the formation of a Contactless Payments Council.
However, the contactless pilots, coupled with the new developments in technology, have convinced the card associations as well as the merchants that contactless cards will be easier and less expensive to implement, Vanderhoof says. They also offer a more promising return on investment in the form of faster moving checkout lines and higher transaction values, he adds.
Like the issuers, retailers’ faith in this wireless form of payment has grown in light of the reported success of pilots in Phoenix (American Express) and Orlando (MasterCard). In 2003, for example, Chase, Citibank and MBNA Corp. all began piloting MasterCard ’s PayPass at more than 60 merchant locations in Orlando, with 16,000 cardholders using contactless cards.
“MasterCard’s Orlando pilot showed that the technology had come to a point where it makes sense,” says David Sanderson, vice president and debit card manager for KeyCorp. “Everything kind of fell into place.”
It helps that RFID technology has become popular for other commercial uses, like inventory tracking. Wal-Mart, for example, recently embarked on a highly publicized move to track its inventory using RFID tags. These ventures helped to underscore the technology’s maturity.
As the technology has become more stable, it has attracted more vendors, says Gauthier, noting that ViVOtech Inc., VeriFone Inc., Oberthur Card Systems and Axalto have been developing contactless cards, readers and software. ViVOtech, for example, has shipped more than 100,000 readers, most of them in the past year as retailers moved from pilot to commercial rollout, says Mohammed Khan, the chief operating officer of the Santa Clara, Calif.-based company. The ViVOtech readers sell for about $100 apiece, Khan says.
“The infrastructure needed to support contactless payment is minimal, ” says Ron Hannah, national category manager for alternative payment and card development for 7-Eleven, which is in the process of adding contactless readers to all 5,300 of its U.S. stores. Hannah says the company began considering the acceptance of contactless payment "about two years ago, to minimize cash and coin in the stores."
"With the number of transactions we see in our stores every day, we are always looking for quicker ways for customers to pay for products and services that can also increase customer loyalty," Hannah says.
Visa's Gauthier says that contactless technology represents a "very clear and simple consumer proposition" compared to smart cards.
"For merchants," says Gauthier, "this is simple to deploy, fast and convenient. The case is clear."
Industry research contends that consumers using contactless payment can reduce their transaction time by as much as 50%. For its part, American Express claims that its ExpressPay users can execute their payments 53% faster on average than using a credit card, and 63% faster than if they used cash. Saving even a few seconds on each transaction, especially at peak times, means merchants can move more customers through the point of sale in less time. It also means lines will move faster, which is a real selling point for businesses where the average transaction value is low and speed counts, such as in coffee bars, fast food restaurants, and convenience stores.
The majority of the more than 10,000 merchant locations initially taking the Chase blink card fit that description. "The connection between speed and convenience is clearest for the quick-serve restaurant or the convenience store," says Tom O'Donnell, senior vice president for Chase's credit card unit. "They're all about moving people through the line as quickly as they can."
Major retailers are also attracted by this lure. Meijer Stores, a regional retail supercenter based out of Grand Rapids, Mich., announced this summer that it would begin accepting PayPass contactless cards in all 171 of its stores. Meijer also announced that over time it will add RFID chips to its 500,000 co-branded GE Consumer Finance credit cards.
Most experts agree that contactless cards are ideally targeted for expanding card usage in merchant sectors where cards have not typically been popular, like fast food restaurants, and other retailers where low-value purchases are made. But, proponents say, the speed, convenience and low barriers to entry for contactless payment will draw other retailers, like Meijer. "Once I get used to using my card in a certain way," says Vanderhoof, "it won't matter whether it's a $5 purchase or a $100 purchase."
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