Business Case for Contactless: Made in India, Aimed at U.S.

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As part of their efforts to deliver banking services on mobile phones, banks have had to learn to work with wireless carriers.

This still-evolving partnership forced the two players, which had rarely collaborated in the past, to confront such issues as how to deliver the software to users and who is responsible for resolving technical problems. And as banks look to add mobile payments to the equation, they face an even more complicated challenge: persuading carriers to install the chips that are required for phones to support contactless purchases.

Citigroup Inc. is hoping that an upcoming test in India of phones with contactless payment capabilities will help it develop a business case to present to carriers in the United States.

"The mobile phone really has emerged more recently as the big thing that's going to take contactless over the edge," Jeff Semenchuk, the executive vice president at Citi Innovation, said in an interview Tuesday.

He said the goal of the Bangalore test, which could get under way as early as April, is to collect enough data on consumers' use of mobile phones equipped with contactless payment chips to demonstrate to handset manufacturers and U.S. carriers that including the same chips in phones in this country would be worth the investment.

"It's no longer a technology trial or anything like that. It's literally a business model trial," Mr. Semenchuk said.

He said Citi plans to collect data in India through the end of the year, and that if the test goes as expected it would be two to three years before mobile phones with contactless chips are widely available within the United States. But once the wireless industry is sold on the idea, the transition could come rapidly, Mr. Semenchuk said.

The idea of including payment features in phones is "where it used to be with camera phones," he said.

Cameras in phones were initially dismissed as a gimmick, but caught on quickly and are now ubiquitous, he said. "It's inevitable that contactless will be huge."

Because this transition is still at least several years away, Citi continues to issue contactless credit cards in the United States to maintain consumer interest in, and awareness of, the technology.

"We're not racing toward issuing tens of millions of contactless cards," Mr. Semenchuk said. "I think the right word would be: we're pacing it. We believe in it. We believe it's inevitable. We've seen enough data to show that people with contactless cards will use them more than a mag-stripe card, so that's why we want to keep moving forward … until the phones are better equipped."

Citi, and other banks that issue contactless payment cards, face a secondary test: getting people to use the cards that have already been distributed, when some people do not even know they are carrying one.

If a small group of consumers contacted by American Banker is any sign, awareness remains low.

Joanne Tang, who works in television in New York, said she knew the cards existed but did not realize that her bank, JPMorgan Chase and Co., had issued her a contactless debit card. "Honestly, I didn't even know I had it until I was told to look for it," she said.

Her friend Anthony Ramirez, who works in advertising, said he knew he had a JPMorgan Chase contactless card, but, "I never really think to use it" for contactless transactions, "and I wouldn't know what to do. It's just a matter of tapping your card?"

JPMorgan Chase was one of the early movers in contactless, introducing its blink-branded cards in 2005; within two years the New York banking company had issued 10 million cards and was heavily marketing them. JPMorgan Chase declined to make executives available to discuss contactless cards.

Mr. Semenchuk said Citi has deliberately pulled back its contactless marketing to devote more resources to the Bangalore trial. It plans to renew its advertising push once the Bangalore trial ends and Citi has the participation it anticipates from the U.S. mobile phone industry, he said.

"It really is the chicken-and-egg situation," he said, "and that's why we're so excited about that launch in Bangalore."

One of the challenges with consumer adoption "is there just aren't enough markets and locations that accept contactless payments," Mr. Semenchuk said. "It doesn't really become an everyday behavior."

He would not say how many contactless cards Citi has issued.

MasterCard Inc. has said that as of the end of the third quarter, 44 million of its PayPass-branded contactless cards had been issued worldwide, and more than 135,000 merchant locations were accepting them. A MasterCard spokeswoman did not return calls this week.

Randy Vanderhoof, the executive director of the Smart Card Alliance, said issuers are using small, focused marketing programs to tout contactless cards, a big shift from the massive campaigns some banks were running a few years ago when the technology was still new. "They feel that their money is better spent at targeted marketing," he said.

Bruce Cundiff, a director of payments research and consulting for Javelin Strategy and Research, said contactless has had its biggest success in the United States in areas that have not traditionally accepted cards, such as transit and fast food.

Beyond that, interest in the format has waned, he said. "It's still a very niche play," he said. Issuers are "looking, for one, to the eventual migration to mobile."

Citi's planned trial in India is a wise move, but it is unclear what it will learn, or whether its findings would carry much weight with U.S. carriers, Mr. Cundiff said.

"Concentrating on making the business case for carriers is in Citi's best interest," he said. "They're doing what they can at Citi, but the question remains: is that enough to tip the balance?"

The risk for Citi is that even if its data proves mobile contactless is profitable for carriers, the carriers may not see Citi's customer base as a substantial enough data set to justify modifying the technology they sell, Mr. Cundiff said.

"It's a good start, but it's still a pilot," he said.

Nick Holland, a senior analyst at Aite Group LLC, offered a theory as to why JPMorgan Chase may not be promoting its blink cards as heavily as it did in the past: its acquisition last year of Washington Mutual Inc.'s accounts, and the need to rebrand the Wamu cards.

"Whoever's making the decision about replacing the card portfolio will have to make a very strong case about adding an extra dollar to each one of those cards," he said. "I think there's going to be some contactless falling off the radar this year."

The push for mobile payments could renew interest in contactless payments, Mr. Holland said. "There are significant rumblings among the handset manufacturers that there are going to be a number of" handsets available with contactless capabilities "by the end of the year," he said.

"I'm pretty certain there is going to be a second wind" for contactless in the United States, he said, "and it will be around mobile."

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