Time may be running out for contactless “tap and go” payment to prove itself as a viable concept as it languishes some five years after the technology’s U.S. launch.
Most observers agree that contactless payment has fallen far short of initial expectations in the U.S., with only 10% of credit or debit cards sporting the horizontal, four-crescent contactless logo and just 70,000 out of some 7 million potential merchants equipped with card readers that can handle the speedier payments.
“Contactless payment development is very disjointed,” says Megan Bramlette, managing associate with Auriemma Consulting Group. “There is a lot of effort going on in bits and pieces, but it needs to come together soon if it’s ever going to achieve significance.”
Visa Inc. last month sent mixed messages on contactless. First it expanded how many merchants could accept magnetic stripe card payments without requiring cardholders’ signatures, sparking debate over a potential dampening effect on contactless. Then a week later, Visa announced plans to add mobile-phone payment capabilities to cell-phone handsets this year to help boost contactless activity.
In that initiative, Visa is collaborating with DeviceFidelity Inc. to offer card issuers a contactless-payment chip consumers could install in the memory card slots of mobile phones. The technology enables consumers to tap their mobile handsets to initiate, confirm and pay through keypad commands.
Visa says an issuer it declined to name will launch its mobile contactless option during the second quarter.
“Integration with the phone keypad is valuable as mobile will be a key driver of contactless,” says Beth Robertson, a director of payments research at Javelin Strategy & Research.
Some 57% of mobile phones have a memory card slot adaptable to Visa’s mobile contactless technology, and Apple Inc.’s popular iPhone is not among them. Visa’s mobile contactless payment option could miss a crucial target market if it excludes iPhones, whose owners show the greatest interest in mobile payment compared with other consumer groups, Javelin’s research shows.
At the least, contactless payment may end up serving primarily as a bridge to the development of mass-market mobile-payment capability through phones that share aspects of its Near Field Communication chip technology.
NFC payment technology, which is being tested in pilots around the world, would enable consumers to use their phones to conduct contactless payments more broadly at the point of sale.
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“Mobile payment is in the process of evolving,” Dave Wentkus, Visa head of mobile contactless payment, tells PaymentsSource. “We do not yet have the elegance of a full NFC payment solution widely available, but mobile contactless is a stepping stone in that direction.”
Critics carp that contactless is sputtering because its backers have failed to market it adequately. Others say the advantages contactless-payment technology offer, such as incremental speed and convenience at checkout, are not quite compelling enough to justify the effort merchants, issuers, terminal makers and consumers would need to make to fully embrace it.
Signs Of Progress
But other recent signs suggest progress in contactless-payment development.
The proliferation of postage stamp-size contactless stickers, for example, is catching on in certain local areas. In New York, mass-merchandise channels are selling First Data Corp.’s Go-Tag contactless stickers to enable consumers to pay for cab rides in the city’s taxis, many of which are equipped with contactless card-readers. Many users attach the contactless sticker to their phones, mimicking mobile payment.
Barry McCarthy, First Data general manager, mobile commerce and POS solutions, tells PaymentsSource that wherever consumers experience contactless payment through cards or stickers, subsequently “they expect it.” He predicts strong growth for contactless stickers this year.
Farhan Ahmad, Discover Financial Services general manager of prepaid and emerging payments, says the results of a recent trial of its Zip contactless sticker technology among 700 of its employees suggest consumers would welcome contactless and, when acceptance is widespread, likely would adopt it.
Ahmad contends contactless stickers may give a shot in the arm to contactless technology because they are versatile. Discover is exploring broader use of contactless stickers for corporate building access and for payment and transit applications. “When more opportunities to use contactless payment emerge, it will spur faster development of contactless readers,” Ahmad says.
Moreover, contactless-payment activity this year began to pick up in Europe and in certain other markets abroad.
To justify serious further investment by participants, contactless payment this year must show significant progress, experts say.
“There should be more communication and education of merchants and cardholders, so people know what contactless is,” says Deborah Baxley, a management consultant with U.S.-based KeyPoint Consulting. “A lot of cardholders may not know they have contactless capability or where they can use their cards.”
Introduced in the U.S. in 2005, contactless payment was touted by proponents as a way to speed up checkout lines and incrementally boost purchase volume as consumers shifted more small cash payments to electronic channels. Contactless transactions typically are significantly faster than swiping a traditional magnetic stripe card, but speeds vary, experts say. Card networks declined to provide comparative average point-of-sale transaction times for contactless and mag-stripe card transactions.
Large U.S. issuers, including JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co., announced rollouts of contactless cards between 2005 and 2007, while several major U.S. retailers, including McDonald’s Corp. and Arby’s, invested heavily in contactless card readers.
But contactless activity began to slow in 2008, and the recession further dampened development. Card issuers and payment networks, which initially touted contactless payment in advertising and marketing, also seemed to back off on promoting contactless.
Chase says it has distributed more than 30 million of its proprietary blink-branded contactless cards to date. However, consumer awareness of contactless remains low. Large issuers decline to say what percentage of their customers have contactless cards.
Inside Contactless, which claims to account for some 80% of contactless-chip manufacturing, shipped its first crop of 2 million contactless chips to payment card manufacturers in 2005, says Charles Walton, Inside executive vice president. Inside’s annual contactless-chip shipments rose steadily to reach 70 million in 2008, then declined to 60 million last year as the recession depressed activity, Walton says.
Inside expects worldwide shipments of its contactless payment chips to reach 75 million this year.
“During the first half of last year we saw a real clamp-down on contactless deployments, as issuers cut back on orders. But this year we have seen demand resurge to 2008 levels,” Walton says.
The total number of new chips does not represent overall growth of the contactless card base, he notes. Some 20% to 30% of new chips are destined for customers whose contactless cards have expired and are being reissued.
Expansion In Europe
Outside the U.S., contactless-payment development has been even slower primarily because of different card-technology infrastructures. Some 7 million contactless cards are on issue in the UK, and another 5 million are in circulation elsewhere in Europe, analysts estimate.
“Until recently in Europe there haven’t been many contactless cards or compatible terminals. But within the last year, and especially the first part of this year, we are seeing a significant uptick in contactless activity,” says Steve Brunswick, strategy manager for France-based Thales Information Systems Security, which plays a key role in writing and developing contactless card security standards.
The rise of contactless payment in Europe, where most payment cards use the EMV smart card standard, is triggering fresh industry discussion about overcoming obstacles to EMV card acceptance in the U.S. (
Contactless payment proponents remain bullish on the technology.
Cathleen Conforti, MasterCard senior vice president for global PayPass solutions, says the network saw “double-digit growth” last year in merchant acceptance of its PayPass contactless technology.
“PayPass acceptance is spreading rapidly in airports, parking garages, shopping malls, vending machines and taxicabs in many large U.S. cities,” she says, declining to disclose the percentage of MasterCards that have been issued with PayPass chips.
Conforti also refutes the notion the network has dropped the ball on effectively marketing its PayPass contactless technology. “Naturally, the initial rollout of PayPass in 2005 was different than our ongoing marketing. We are in a sustained marketing phase, where we promote PayPass in all our global sponsorships, in TV commercials and radio in certain regions,” she says, noting MasterCard also helps issuers promote PayPass in holiday and back-to-school promotions.
Visa says it is tracking “healthy” contactless-payment growth in pockets of the U.S. and abroad, a spokesperson says, noting the difficulty of seeing the effect of its slow and steady adoption. “Transit systems are an ideal area to see how contactless payment is growing because wherever there has been a mass implementation for transit, it has caught on fast for the surrounding retail operations. Eventually this will happen more broadly,” the spokesperson says.
For its part, the Smart Card Alliance, which has been a staunch contactless backer for the past half-decade, says the case for using contactless payment to thwart fraud is growing stronger every year. Contactless payment provides greater security than do mag-stripe cards, whose data are vulnerable to skimming and replication for fraudulent transactions.
Card-skimming is a growing problem in the U.S., according to card-security experts. But each contactless chip transaction has a unique numerical code, preventing replication. Moreover, contactless cards are almost impossible to counterfeit, contactless technology developers say.
“Fraud prevention is becoming one of the driving forces for contactless payment in the U.S,” says Randy Vanderhoof, the alliance’s executive director. “Certainly for issuers because they pay for a majority of the fraud, contactless payment would be a huge leap forward in preventing card skimming, which is on the rise.”
Though contactless payment may not reach its full potential in the U.S., many industry players agree contactless payment development could help lay the groundwork for NFC-equipped mobile handsets that eventually could spark widespread mobile payment adoption.
But NFC-based mobile payment has been delayed for several years while wireless carriers, issuers and handset manufacturers struggle to establish a workable business model. The latest forecasts say NFC-equipped phones may not arrive en masse until 2012.
While further contactless-payment development and merchant adoption could help fertilize the point-of-sale environment for NFC payment when it arrives, contactless-payment technology alone does not provide the convenience mobile payment would, Auriemma’s Bramlette contends.
“If I can actually pay using the phone, I’m saving a step. Otherwise, just paying with a contactless card is about the same amount of trouble as paying with a magnetic stripe card,” she says.
No Signature Required
Indeed, many merchants could cut out a big chunk out of transaction time by implementing the Visa No Signature Required and MasterCard Quick Payment Service. Under those programs, customers making purchases at qualifying merchants, including many fast-food, convenience and supermarket chains, are not required to sign for purchases after swiping their cards if the transactions do not exceed a certain limit ($25 for Visa, and as high as $50 for MasterCard).
Visa recently extended its No Signature Required program to 98% of all merchant categories, it says, touting the speed and convenience.
The no-signature process has significantly sped up checkout lines, although data are mostly anecdotal, observers say. “The no-signature rule changes have taken away a good chunk of the contactless value proposition,” Red Gillen, a senior analyst with Celent, tells PaymentsSource. “If a magnetic stripe card can come close in terms of speed (for low-ticket transactions), what’s the big deal about contactless?”
Contactless-payment development has failed to reach initial expectations. New developments may expand the use of the technology, but ultimately consumers will decide whether they have the patience to wait out broad-scale rollouts.
