Contactless payments present a huge, global opportunity for banks. The technology can help card issuers further displace cash usage by providing consumers and merchants with a convenient and quick payment method that they can consider complementary to "traditional" signature or PIN-authorized payments. Successfully expanding the use of contactless payments enables issuers to capture myriad day-to-day spend - on items such as fast food, newspapers, and groceries - which consumers and merchants are reluctant to use plastic for.
The momentum behind contactless payments is growing. They are already part of daily commerce for thousands of merchants and millions of consumers worldwide. These numbers are expected to grow dramatically in coming years: According to UK-based Juniper Research, there will be more than 700 million contactless payments devices in use worldwide by 2012.
However, no matter how many contactless payment-enabled terminals and devices are initially installed, further investment won't happen without sufficient volume-based revenue to achieve payback. The key lies in achieving a critical mass of transaction volume as quickly as possible. Therefore, the prime objective of any contactless-payment deployment program must be to encourage usage. This will create a "virtuous circle of investment," wherein lots of contactless payments encourages re-investment in new terminals and devices, which in turn leads to more usage.
Achieving transaction volume is not just important for achieving good return on investment (ROI), it is also necessary for operational success. Merchant staff who are unfamiliar with contactless transactions due to low usage are more likely to make a poor impression upon consumers, dampening consumer enthusiasm for contactless payments. However, as usage grows, merchant staff become more adept at facilitating contactless transactions. Eventually, contactless-payment adoption reaches a tipping point, whereby it is increasingly driven by both cardholder and merchant demand. This is already evident in the most mature contactless markets, found in parts of Southeast Asia and North America.
Three basic tactics, ideally implemented together, can increase the likelihood of achieving this critical mass of transaction volume:
1. Start with specific geographic areas. Contactless-payment volume can be maximized if a zone-by-zone deployment is applied to issuing and/or acquiring, as this creates a much higher likelihood of a contactless device-carrying customer encountering an appropriately-enabled merchant. Further, the smaller and more focused the target zone is, the higher the transaction volume will be for any given investment. However, this tactic is not without potential challenges. On the acquiring side, this will be harder to achieve in countries with a highly-consolidated retail industry, as large merchants will resist the need for having multiple technical configurations. On the issuing side, banks may find it difficult to target consumers in a tightly defined geographic zone.
2. Replace existing cards and terminals. Launching contactless payments as a feature of a new product is unlikely on its own to produce the necessary volume. Instead, banks should consider re-issuing a large part - or better still, all - of their portfolio with contactless devices. Maximum volume can be achieved through out-of-sequence replacement of cards and terminals, whereas natural replacement cycles (e.g., as a result of card expiration) may not produce the necessary volume.
3. Coordinate contactless deployment among issuers and acquirers. For all but the largest issuers and acquirers, even a complete replacement of their own devices and terminals may not alone produce the critical mass of contactless transaction volume that will excite merchants and promote growth. In these circumstances, transaction volumes can be significantly increased by agreeing with other issuers and acquirers as to where and when devices and terminals will be deployed.
Acquirers that roll out new contactless terminals in conjunction with other acquirers will also get a boost. The presence of more acquirers (and, consequently, more terminals) in the market is likely to encourage larger-scale issuance, in turn leading to more consumer and merchant recognition and therefore uptake - resulting in increased merchant service charge (MSC) revenue. Issuers and acquirers may choose to "fast-follow" other pioneering institutions' deployment patterns in order to leverage their existing device and terminal volume.
Regardless of which of these tactics acquirers decide to adopt, it is important that they also understand and communicate to merchants the business case for contactless payments. Depending on the retail sector involved, primary benefits might include increased foot traffic and average spend, as well as reduced waiting time.
Obviously, the presence of terminals in stores and devices in wallets will not guarantee usage by themselves. So, before, during, and after deployment, issuers will need an effective communications program aimed at consumers explaining the concept and encourage contactless-payment use. Acquirers, too, will have to support the effective training of merchants' employees to make contactless transactions easy and pleasant for consumers.
Mark Rennie Davis is a senior consultant in the global payment consulting group of MasterCard Advisors, the professional services arm of MasterCard Worldwide.
