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Contactless Cards - Tentative Steps
VRL Financial News Publishing, Feb 2011
Proclaimed as the development that will transform how global consumers pay for goods and services, contactless payments are currently a hot financial topic. In this report, we investigate the extent to which different markets around the world have developed to date, and provide analysis and insight into how they will develop over the next two years.
Data rich and full of previously unpublished case studies from around the world, the report profiles both regionally-focused contactless schemes like Hong Kong’s Octopus, and the global solutions provided by payments giants Visa and MasterCard. Retailer initiatives and the progress of new products are also profiled to provide the reader with a view of the development of contactless from a range of perspectives. The likelihood of the development of contactless payments using other devices, such as the mobile wallet, is also considered and developments in this area of the market are discussed.
The payments industry appears to be pushing the development of contactless payments, but the situation is very much ‘chicken and egg’. Card issuers like Barclaycard and Bank of America are issuing the contactless-enabled cards regardless of the level of consumer demand for them, but outside of London, a very small number of merchant outlets accept them. Whilst there is an incentive for retailers that operate in low transaction value markets to adopt the technology in order to reduce cash transactions, it is unlikely that larger retailers will be in any rush to adopt the technology due to the restrictions on transaction values that fall way below consumer spend in their stores. For this payment technology to reach anywhere near to mass adoption, retail chains will require a good understanding of the business case and payback period for investment in updating their POS systems. They are also likely to require some financial support from either the card provider or acquiring bank.
Despite various high profile marketing campaigns, consumer understanding of contactless is low and many people who have the functionality on their cards are simply unaware that this is a payment option for them.
Key takeaways of this report include:
-Contactless cards are still in their infancy in most countries and they are likely to remain so for the next year
-Growth of this payment technology is being restricted by limited retailer acceptance and low consumer awareness and understanding, particularly in the UK
-Despite having been introduced to the US market for a number of years, contactless cards account for just 15% of the total payment cards in issuance
-Larger retailers, where the majority of retail spending takes place, are unlikely to be in any rush to make the required investment in updating their POS terminals due to the restrictions on contact and PIN-less transaction values
-The mobile phone will eventually become a payment device, but it will take longer than payment industry executives are predicting to reach anywhere near mass market proportions
-At present, contactless is being pushed by the card providers and retailers and, although card users like the technology when they use it, contactless users represent a tiny proportion of the payments market
Summary
Proclaimed as the ‘next big thing’ in the payments industry, there has been a lot of media attention directed to the growth of contactless payments over the last five years or so. But to what extent is the media attention justified? This report presents the findings of research into the growth of this payment technology in key regions around the world.
The picture that emerges is one of fragmentation and complex commercial models, with a marked lag between contactless card issuance and merchant acceptance, even in those markets considered to be well developed. In the US for example, there are around 100m contactless cards in issue, yet only 2% of merchant outlets are reported to accept this form of payment, despite it being available for nearly 10 years. Migration to chip and PIN is a more emotive topic in the US, with retailing giant Walmart making its position clear in the media as being in support of this more secure payment method, ahead of the introduction of contactless payments. This makes sense when the level of plastic card fraud in the US is taken into consideration, estimated by Aite Groups to cost US$8.6bn p.a. The push for migration is also in line with the strategic aims of large retailers to gain a greater share of consumers’ wallets by broadening the range of products and services offered in stores.
Merchant acceptance of this payment methodology, alongside the issuance of cards and other payment devices, is crucial to the success of contactless payments. The majority of merchants are unlikely to be willing to fund the migration to contactless payments unless a clear business case and short payback period can be identified to them. In a number of countries, for example, Turkey and the UK, the card issuers and payment processing companies are footing the bill for the introduction of the required technology, and this will need to continue in order to increase merchant acceptance of contactless payments until the benefits of migration have been conveyed.
Contactless and PIN-less payments are generally capped at a low level – for example, £15 in the UK and $25 in the US, above which a PIN or signature is required for payment authentication. All sides are conscious that these latter moves are self-defeating for the contactless industry. Retailers that have adopted contactless typically operate in the convenience market, where speed of service is considered to be vital. Examples of global companies that have embraced contactless payment technology include McDonalds, 7- Eleven, Starbucks and Burger King – organisations characterised by quick, low-value transactions with an emphasis on speed of service. Contactless payments are not, therefore, competing with debit or credit cards. Rather, they are mainly competing with cash and as such, are still in their infancy in terms of their market share of the overall value and volume of financial payments.
As the early adopters of technology, consumers in the Asia Pacific region have been making contactless payments using cards, mobile phones and other devices as early as 1997, with the launch of the Octopus card scheme in Hong Kong. As with a number of other closed loop contactless schemes, such as Oyster in London, Octopus began as a solution for the elimination of cash payments on Hong Kong’s transport network and has since developed beyond travel to become accepted in a number of merchant outlets. Although this scheme is well established and deemed a success in Hong Kong, with 95% of consumers aged 16+ owning a card, and card issuance almost three-times the size of Hong Kong’s population, the scheme does not adhere to international payment technology standards. In other countries in the Asia Pacific region, contactless payments are commonplace, but again, a number of proprietary and closed-loop systems are in place.
Many of the trials underway in various countries have been instigated by Visa and MasterCard. Mainly located in large conurbations, Visa payWave and MasterCard PayPass do adhere to international standards, and both schemes are open-loop meaning that cards can be used in a wide range of retail outlets, and not just for payment for public transport, or where proprietary readers are installed. Much of the trial activity is taking place in Europe, seen as the next region for growth in contactless payments. UK card providers have been the most proactive in the region in terms of card issuance, with over 11m in circulation at the start of 2011. However, the majority of merchants in the UK have not been eager to upgrade their POS systems to enable them to accept contactless payments. Approximately 40,000 merchant outlets accept contactless payments in the UK, forecast to grow to 60,000 in 2011, representing a fraction of the total number of vendors in operation given that this estimate includes all sectors, including 8,000 London buses. One of the companies with outlets in the UK that see’s benefits of contactless payments over cash is convenience retailer SPAR. It is making a significant investment in the roll-out of contactless payment acceptance to appropriate stores, having developed a business case that shows that the payback period for doing so could be as short as 18 months. Other merchants have not yet made such a commitment, and some of the large multiple retailers have indicated that they have no intention of upgrading their extensive POS systems until their existing terminals are fully amortised.
It is a different story in the Turkish payments market, one of the most progressive markets under coverage. Although the number of contactless cards in issue is lower than in the UK, with, card issuers like Garanti Bank of Turkey have taken a proactive approach towards developing a contactless payments infrastructure. Recognising that contactless payments are in a ‘chicken and egg’ situation, i.e. merchants don’t want to invest in the installation of contactless card readers and POS systems until consumers are issued with contactlessenabled cards or other devices, the company has implemented a number of initiatives to boost growth in this area. In May 2010 it trialed a mobile handset add-on in the form of a SIM card overlay and NFC-enabled antenna. Garanti was keen to test contactless mobile payments in Turkey due to attractive market factors such as the young profile of the country’s population, where the median age is just 28.1 years compared with 40.5 years in the UK. Garanti has now launched a commercial roll-out of the add-on in partnership with mobile network operator Avea, and the product is now available to Turkish consumers in Avea stores and other mobile phone dealerships. In addition to this innovation, Garanti has also recognised that retailers are unlikely to invest in contactless card readers themselves, and it has developed a commercial arrangement whereby the bank pays for the contactless technology to be installed and then charges a monthly fee to the merchant to recoup that cost over a period of time. Further, Garanti has committed to investment in the installation of contactless readers throughout merchant networks, unlike many of the trials taking place throughout Europe whereby only branches in major cities are included.
This raises the issue of the development of contactless mobile payments. Predicted to be the wallets of the future, the reality is that the global payments industry is at least 3 years away from the mass adoption of the mobile wallet. A number of NFC compatible handsets have been developed, so advancement of the technology is not an issue that is preventing the growth of this type of payment. Contactless mobile payment technology has also been proven in markets in the Asia Pacific region, the US and in trials in Europe, including in the UK and in Spain. Despite this, various factors are inhibiting the growth of contactless mobile payments. The commercial model is complex in terms of ownership of the customer, the marketing rights involved in the relationships, and profit share arrangements. Apart from countries in the Asia Pacific region, consumer education is lacking, and consumers are likely to need familiarity with contactless cards before they are comfortable with using a mobile phone as a payment mechanism.
Although the manufacturers have developed NFC compatible mobile handsets, they have been somewhat reluctant to release them to the market due to a lack of a contactless mobile payments acceptance infrastructure. When the handsets do become more widely available, there is a question over the extent to which consumers will be willing to switch to them just to gain access to another payment method. Having recognised the lack of payment-enabled handsets in the market as an opportunity, technology companies like On Track Innovations, have produced a number of add-ons containing NFC including stickers and antennae, such as that adopted by Garanti. Such add-ons will provide an interim solution to the lack of NFC compatible hardware available to consumers, although the extent to which consumers will be happy to add such items to their prized i-Phone or Google Android devices, thereby changing its look and feel, remains to be seen.
In summary, contactless payments are being pushed by the payment providers without necessarily being demanded by consumers. Aimed at displacing cash, which is generally disliked by merchants and financial institutions due to the costs of handling it (including security), contactless payments face strong competition from increasingly popular chip and PIN debit card payments. Although contactless cards are the short-term future for low-value payments, they will over time converge with mobile handsets. Innovators like Google and Apple have already launched NFC-enabled devices, and other mobile handset manufacturers will follow when acceptance of contactless mobile payments broadens.
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