American Banker  |  Tuesday, March 14, 2006

By Chris Costanzo

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So far, so good. That's the word from the handful of merchants now accepting contactless cards.

Though they reported some minor frustrations with their rollouts, most are now upbeat about the technology and want to see more of the cards in circulation.

"Help us out," said Rich Steckroth, the manager of new business development at Sheetz Inc., in a plea to issuers. "Get more cards out in the market."

Sheetz, an Altoona, Pa.-based chain of 320 convenience stores with gas pumps, was prepared to begin accepting contactless cards in January of last year, but there were none in the United States until May, Mr. Steckroth said.

Merchant opinion is crucial at this stage because retailers bear the brunt of installing terminals that can accept the cards.

And though contactless readers are becoming standard add-ons to terminals, installing the technology at gas pumps requires software integration, which costs thousands, versus the hundreds that terminals cost.

MasterCard International, Visa U.S.A., and some other large financial companies, such as JPMorgan Chase & Co., American Express Co., and Citigroup Inc., say they have made the technology a cornerstone of their card strategies this year.

"We believe this is an innovation whose time has come," said Tom O'Donnell, a senior vice president at JPMorgan Chase, which has bet big on the technology with its Blink card.

Contactless cards use radio frequency identification technology. Instead of swiping the cards through a reader, users can tap them on one or wave them nearby. That is expected to speed up transactions and increase spending.

Though merchant feedback indicates that the cards do not always live up to that promise, the customer loyalty they foster more than compensates, the retailers say.

Worldwide, about 5 million MasterCard PayPass cards and about 4 million Visa Contactless cards are in circulation. In the United States, about 25,000 merchant locations accept them.

Issuers hope that the cards will catch on once cardholders and accepting merchants reach critical mass.

Some merchants have been surprised by how easily customers learn to use the cards, though some front-line employees do not know how to handle them.

Others said they want to see more contactless debit cards and higher dollar limits for charges without a signature.

Sheetz was prepared to begin accepting contactless cards in January of last year, but there were none in the United States until May, Mr. Steckroth said.

Meijer Inc. of Grand Rapids has a chain of 171 convenience stores, most of them with gas pumps. Michael Ross, its director of marketing and financial services, also wants more contactless cards in circulation.

"The biggest challenge we faced was making the decision to put the technology in place without cards in the marketplace," Mr. Ross said. "We're hoping to see a major effort this year from the banking community to put cards in the hands of consumers."

Mr. Steckroth said Sheetz decided to accept contactless cards mainly to speed up transactions and free up parking spots. Convenience stores need to move customers in and out fast, he said. "If there's a full lot, a person will drive by, so if we can make an empty spot, that's a good thing."

The time savings - about eight seconds a transaction - comes from consumers' not having to extract cards from their wallets, put them back in, and sign receipts, Sheetz has found. Waving a card in front of a reader takes about as much time as swiping one through, Mr. Steckroth said.

Those eight seconds become meaningful only if many cardholders save them, he said. The contactless cards are "not yet affecting the [parking] lots," he said. "We know it's faster, but we've got to get a lot of them to make a dent."

In addition to accepting contactless cards, Sheetz has been issuing a cobranded one with JPMorgan Chase since May. Those cards are building loyalty, Mr. Steckroth said. At his stores cardholders who tap use their cards at least 30% more than those who swipe, he estimated.

Tap transactions are slightly smaller than swipe transactions, Mr. Steckroth said. "It's been pretty consistent for the last seven months," he said. "It's not material, but it's always less." The average contactless purchase of gasoline, for example, is about 30 cents less than a swipe purchase, he said. "I can't explain it."

But because people with contactless cards come in much more often, they spend much more over all. It is "a huge win," Mr. Steckroth said. "It's sizable enough that we're thankful we went down this path."

At the 70,000-seat M&T Bank Stadium, home to the Baltimore Ravens football team, cardholders seem to be spending more at concession stands. The stadium began accepting credit, debit, and contactless cards last season, and the amount of money spent on food and beverages increased about 10%.

That number "does not generally increase every year," said Kevin Rochlitz, the Ravens' director of corporate sales.

During its eight home games last season 22,542 credit-card transactions were conducted at the stadium. Only 2,563 involved contactless cards, but the Ravens hope to double that number next season, Mr. Rochlitz said.

About 9,000 fans carry cobranded contactless Ravens credit cards. Contactless cards seem to be speeding transactions, Mr. Rochlitz said, but he said he had no data on the phenomenon.

Bailey Co., a franchisee of 67 Arby's restaurants, has found that contactless cards are not a huge time saver in the 49 of its stores that now accept them. But the cards do make a big difference in drive-through transactions, said Jeff Gordan, the controller of the Golden, Colo., company.

Bailey had hoped that contactless cards would shave at least 10 seconds off drive-through transactions, and the goal was easily achieved, Mr. Gordan said. Drivers do not have to pass their cards through the window, and the problem of people driving off without them is eliminated.

"If you can cut 10 seconds off your time, that's extra cars going through each hour, and that's what it's all about," Mr. Gordan said.

Mr. Ross said that Meijer has found contactless transactions to be about 17 seconds faster. That time savings should help achieve its goal of an 18-month payback on its investment in the new terminals, he said.

Meijer's business case is based purely on labor savings at the cash register, which are expected to get customers through faster and make their experience more pleasant, Mr. Ross said. "If you decrease wait times, that means a lot to customers," he said.

Meijer has not analyzed how much faster transactions are at its gas pumps, but it has observed customers using the cards in creative ways that speed up checkout. For example, many customers just wave their wallets in front of the readers; that saves them time and lets them keep their gloves on in cold weather.

Merchants have been pleasantly surprised at how quickly customers have learned to use the cards. "Consumer acceptance was the easiest part," Sheetz's Mr. Steckroth said. "Going into it, we thought we'd be doing a lot of training on the difference between tap and swipe, but it's not been an issue."

Sheetz's biggest challenge has been teaching employees how the cards work, and high turnover does not help. At this early stage, employees don't see a lot of contactless transactions, Mr. Steckroth said; when one comes along, "they freeze."

Mr. Rochlitz said the Ravens avoided that problem by hiring mostly high school students, who tend to be adept at picking up new technology. "It worked out perfectly," he said.

Bailey's Mr. Gordan said customers quickly notice the benefits of contactless cards. "They realize they don't have to give their card up" for a moment to make a purchase, and that is a selling point now that consumers are more aware of credit-card fraud, he said.

Some merchants are rethinking the no-signature limits on the cards. Contactless purchases of over $25 still routinely require a signature, slowing down those transactions. The Ravens will probably go up to a $50 limit next year, given the rising cost of stadium hotdogs and beer, Mr. Rochlitz said.

But 80% of Sheetz sales are for less than $25, so the convenience store chain plans to stick with its currrent limit, Mr. Steckroth said.

Mr. Ross said Meijer has raised its limit to $50 for customers who carry its cobranded contactless card.

Given that contactless cards are intended for low-cost purchases, some retailers would like to see more contactless debit cards. Consumers are more likely to use debit than credit cards for small-ticket purchases like fast food, Mr. Gordan said.

Mr. O'Donnell said JPMorgan Chase decided to start with credit cards because its national scope in that business lets it pick markets in which to build a critical mass of merchants and consumers with contactless cards. It is also developing a contactless debit card, though its debit-card presence is limited to regions where it has branches.

The company has reissued credit cards with contactless capability to the 7 million cardholders in its six major markets - Colorado, Georgia, New York, Philadelphia, Dallas-Fort Worth, and Orlando. About another million have requested one or were issued one when they became customers, Mr. O'Donnell said.

KeyCorp of Cleveland said last August that it had become the first banking company in the nation to issue a contactless debit card, and that it expected all 2 million of its consumer and small-business cards to be contactless by the end of this month.

The company thinks going contactless "makes more sense on a debit card," said vice president Dave Sanderson, its debit-card product manager.

KeyCorp views contactless cards as a way to acquire customers, Mr. Sanderson said. "A lot of people like to use the latest technology," he said. And like JPMorgan Chase, it expects the feature to increase card use.

"The card that our customers use most frequently is the one they become most loyal to," Mr. O'Donnell said. "In the card business, loyalty translates long-term into profitability."

Ms. Costanzo, American Banker's technology editor from 1998 to 2002, is a freelance writer in Maplewood, N.J.

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