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From the September 2008 Issue
Arby's Restaurant Group Inc., a U.S.-based fast-food chain, rolled out contactless terminals quickly in 2006, covering its 1,000 company-owned outlets nationwide in a few months following only a two-month trial. Now Arby's believes it moved too quickly to embrace the new way to pay.
Not enough customers carry contactless cards, and many of those who do are unaware they can tap the cards to pay, according to Gavin Waugh, Arby's vice president and assistant treasurer. And the chain's young cashiers often know little more about the technology than the consumers do.
Arby's executives still believe contactless eventually will deliver on its promise of more convenience for customers and higher sales. But that will only happen when more cards find their way into consumers' pockets and enhancements arrive, such as Near Field Communication mobile phones that customers could tap to pay just as they would do with contactless cards, says Waugh.
With the U.S. contactless rollout, now in its fourth year, rolling on, the hype that this payment method would capture a sizable share of cash transactions more and more is being overtaken by reality, say observers.
The number of contactless cards issued this year will double that of 2007. Total cards on issue since 2006 will top 100 million by the end of the year, which would represent about 10% of the debit and credit cards in circulation (
Perhaps a bigger obstacle to growth is the limited number of merchant locations embracing contactless payment. Observers estimate that no more than 70,000 outlets have readers in the U.S., not counting vending machines. Though progress, it still represents only about 1% of card-accepting merchant locations nationwide.
Contactless backers, such as the international card brands Visa Inc. and MasterCard Worldwide, which still decline to release actual figures, say contactless transactions are growing and in some locales and merchant categories account for as much as 20% of card transactions.
One of the few retailers to give an indication of how much consumers are using the cards is CVS Caremark Corp., the largest U.S. retail pharmacy by number of stores. The chain 18 months ago said contactless transactions accounted for fewer than 1.5% of all card transactions.
The United States has the largest rollout of open-loop contactless payment cards and terminals in the world and is second only to Japan in total contactless cards or tokens and terminals. So what happens in the U.S. has implications for other rollouts of the technology, such as one begun last fall in the United Kingdom and others earlier in Malaysia, Taiwan and South Korea.
"Thus far, we haven't seen a lot of 'pull demand' from (American) consumers," says George Peabody, head of the emerging technologies unit of U.S.-based research firm Mercator Advisory Group. "Contactless isn't that interesting."
He and a growing number of other observers, including some big-name issuers, view the coming of NFC mobile phones as a necessary complement to cards for contactless payment to pay off.
The phones could store multiple payment accounts and run mobile-banking services, and they could let banks and merchants send e-coupons and other promotions directly to customers. Customers could check account or rewards balances and receive digital receipts. And they could download applications and upgrades over the air.
"Everybody is starting to have a mobile-payments strategy again," says Ed Kountz, senior analyst at U.S.-based JupiterResearch. "The question is, what do consumers really want, and how are they reacting to contactless?"
Looking Past Cards
Among the major U.S. issuers known to be seriously looking at offering contactless payment through mobile phones are the nation's two largest in terms of assets, Citigroup and Bank of America Corp.
Citi has hired a customized-phone manufacturer, Mobicom Corp., to build an NFC phone for the bank. Some observers believe Citi eventually will distribute the tiny phone model, which would carry the Citi brand, to preferred customers.
In June, BofA announced it already had signed up 1 million customers for its mobile Internet-based banking service, just 13 months after launching it in May 2007. A bank executive tells Cards&Payments BofA likely eventually will make contactless mobile payment part of its set of mobile-financial services.
The phone is "a service channel, it's an information channel, then it's a payment channel," says John Suchanec, BofA senior vice president of payment technology.
Both Citi and BofA thus far have declined to join their large rival JPMorgan Chase & Co. in rolling out contactless cards. Citi and BofA have issued perhaps a few million contactless cards or key fobs between them. Chase, on the other hand, has issued 12 million of its "blink" credit and debit cards since 2005.
Compared with conventional magnetic stripe cards, blink has been "positive" in terms of increasing the rate of account activation and spending among cardholders, Michael Kutsch, first vice president and senior marketing manager for Chase card services, said in May at SourceMedia's CTST conference in Florida. SourceMedia also owns Cards&Payments.
"They do tend to spend more, and we believe that it is at the expense of cash," he said, declining to release specific results. He added that Chase would continue to issue contactless cards, which indicates the bank is renewing blink cards now expiring.
Citi and BofA are being even more coy about their plans for contactless cards, though there is little evidence they are planning to launch any major rollouts. That seems even more unlikely given the financial woes of the banking industry.
Another major U.S. issuer, Discover Financial Services, however, has made no secret it is looking past cards to mobile phones. Discover, which also runs a major credit card network in the United States, has yet to issue any of its so-called Zip contactless cards. But it has made sure to get the Zip application installed in thousands of contactless readers that also accept rival Visa, MasterCard and American Express Co. payments at convenience stores, fast-food restaurants and other points of sale.
On the card side, contactless costs about five times as much as conventional mag-stripe cards, and Discover is not convinced the cost is worth it.
"More than a dollar for a (contactless) card is a lot to invest without knowing what the return on investment will be," says Christy Hart, Discover director of network marketing. "We believe readers deployed today pave the way for NFC payment tomorrow. We definitely could go straight away to mobile."
Of course, just when that tomorrow arrives depends on when mobile-network operators, banks, transit operators and other service providers agree on a business case for NFC and when phones in significant quantity and variety hit the market.
The phones, embedded with contactless chips and short-range radio antennas, can act like contactless banking or transit cards, but with the addition of a network connection, screen and keypad.
The phones also can read data off chips embedded in posters or other in-store promotions, and two NFC devices can exchange data when users tap them together.
Experts do not expect a sufficient number or assortment of standard NFC phones to be available until at least late next year. By then, telecommunication companies, banks and other players may or may not have worked out how they will share revenue from the NFC services they offer.
Stuck On Phones
Until then, some issuers are showing a growing interest in contactless stickers that consumers would adhere to the backs of their phones or other electronic devices and tap as they would contactless cards.
The stickers come embedded with contactless chips and antennas along with ferrite shielding to cut distortion from the phone's battery or other components to the radio signal that carries the transaction data between the sticker and point-of-sale terminal.
The payment application in the sticker will not be able to communicate with the mobile network or with the phone itself. So it can do no more than what a contactless card can do–send the payment data to the terminal via the radio waves.
But just putting the application on the handset could raise much-needed awareness among consumers about contactless technology, says Einar Rosenberg, chief technology officer for U.S.-based Narian Technologies, which develops applications for NFC phones and phones with stickers.
An informal survey the company conducted on the Internet late last year found that two-thirds of the 100 respondents said they would most prefer to pay from a mobile phone–far more than with either cards or key-fobs–after the firm showed pictures of the various form factors. The survey, however, did not ask about security concerns, which other surveys have revealed could deter consumers from tapping to pay with their handsets, especially if the phones carried multiple payment accounts.
Security aside, JupiterResearch found only 10% of respondents to a much-larger survey it conducted in March–of nearly 2,500 U.S. consumers–said they would be interested in paying with NFC or other types of contactless mobile phones.
Consumer payment habits do change, but they change for a reason," says Kountz. "The value has to be visible and has to be demonstrated. The next four years provide the opportunity to do that."
The problem with cards is consumers are used to swiping them to pay, and the contactless logos on the cards are small, says Rosenberg.
"Nobody knows where to use them; nobody knows they even have them," Rosenberg says. With stickers, consumers get the message. "It's stuck on my phone, my phone is wireless, (so the sticker) must be wireless," he says.
First Data's Gambit
This, and the fact stickers can make just about any mobile phone contactless, has sold First Data Corp. on the idea. The U.S.-based payment card processor is making a big push into mobile commerce. It wants to become a major player when NFC gets rolled out as, among other roles, a go-between among retailers, banks and other issuers putting their applications onto NFC phones.
First Data, which could help retailers and banks download and manage their own applications on the phones, has made a major investment in Vivotech Inc., a U.S.-based developer of contactless readers and NFC technology.
The processor views stickers as a bridge between contactless cards and the coming of NFC mobile phones and as a way to encourage more merchants to accept contactless payments, says Dominic Morea, First Data senior vice president for mobile commerce solutions.
First Data plans a rollout of stickers by the end of the year in certain U.S markets. It is targeting the product, called Go-Tag, to retailers for which it issues prepaid gift cards (
"We think this would give the Go-Tags an immediate opportunity to drive contactless transactions instead of waiting for a contactless cardholder to come in," Morea tells Cards&Payments. "In this respect, the Go-Tag is obviously contactless. It's being distributed by a merchant channel."
In addition, most or all merchants that have installed contactless readers made by Vivotech that accept the open-loop contactless applications from Visa and MasterCard easily could add First Data's Go-Tag application, says a source.
Later, First Data could issue stickers with separate payment and loyalty applications on the same embedded chip, says Morea, who declines to disclose details of the rollout. Multiple applications are possible on contactless cards, but no issuer has yet introduced such a card.
First Data, as a large acquirer and issuer of payment cards for financial institutions and retailers on an outsourced basis, is well-positioned to encourage more retailers to adopt contactless using the stickers, say some observers.
"They can drive both sides, and they can do it in very targeted manner," says Charles Walton, senior vice president for payments at France-based Inside Contactless SA, which holds the lion's share of the U.S. market for chips used in contactless cards. The vendor plans to introduce its own sticker this year.
First Data plans to showcase its Go-Tags Aug. 25 to 28 at the Democratic National Convention. Thousands of attendees will receive Go-Tags designed as commemorative pins, each one loaded with $10 in value that can be tapped for purchases at concession-stand credit card payment terminals located throughout the Denver Pepsi Center, where the event will be held.
Going To School
But First Data will not be the first processor to issue stickers. U.S.-based credit and debit card processor Heartland Payment Systems Inc. began rolling out about 8,000 stickers to students and staff at Slippery Rock University in Pennsylvania a year ago. Users who put the stickers on their phones or iPods can make purchases with the reloadable "Rock Dollars" proprietary prepaid payment application at merchant locations both on and off campus.
Like First Data, Heartland views stickers as a way to encourage merchants to move to contactless. The merchants pay a lower transaction fee, 2% of the sale, which compares with a discount rate of about 2.7% for open-loop Visa- and MasterCard-branded credit and debit cards, says Robert Carr, Heartland CEO. Of the 2%, Heartland keeps 0.5% and gives the rest back to the school and students.
"We believe our approach will give merchants an incentive to accept (contactless payments)," Carr told Cards&Payments during an interview earlier this year. "We believe our program will speed up the (contactless) rollout in the U.S."
Heartland since has expanded contactless stickers to other colleges and universities and plans to roll them out nationwide to the schools and campus-area merchants for which it processes transactions. The stickers at the various schools would be interoperable, says Carr.
"The intention is to have a national network," he tells Cards&Payments. "It's not a traditional closed-loop system."
Like the First Data Go-Tag, Heartland's payment stickers will compete with Visa's payWave contactless application and MasterCard's PayPass.
But both Inside's Walton and Oded Bashan, CEO of Israel-based On Track Innovations, which produces the stickers for Heartland, say they also are seeing interest from banks to issue stickers for their cell-phone carrying customers. These would support either payWave or PayPass.
Still, for those issuers with their eye on mobile payment, "the end game is definitely not a sticker; the end game is technology that is in the handset itself," notes Bruce Cundiff, a senior analyst for U.S.-based Javelin Strategy and Research.
And without contactless cards to help build the infrastructure of readers, mobile-contactless payment will not succeed, say most observers. Neither NFC phones nor stickers could generate enough users to encourage a large number of merchants to move on contactless.
Merchant Shortfall
Card acceptance also is coming up short, observers say. Though retailers such as Arby's complain that not enough of their customers carry cards, issuers gripe there are too few merchant locations at which their cardholders can tap.
"We need more merchants, but it's not just about the numbers of merchants but the types of merchants," says Chase's Kutsch. "It's important the merchants that accept contactless are places our customers will shop."
Kutsch doubts lowering interchange is the answer, however. "[The solution] may be delivering new loyalty capability," he says, declining to be more specific.
Visa, MasterCard and AmEx have refused to lower interchange or merchant-discount fees in the United States on contactless transactions, which some merchants have sought. Instead, they have subsidized terminals to encourage retailers to adopt the technology.
Gwenn Bézard, research director for Aite Group, a U.S.-based research firm, does not believe the card brands will lower the fees. The card networks are promoting all types of cards to replace low-value cash transactions, whether they are conventional no-signature swipe or contactless cards, he notes.
"If you lower interchange, why would you do it for contactless and not for swipe?" Bézard tells Cards&Payments.
Bézard is among the analysts who does not see contactless taking off in the U.S. Nor does he see much advertising from the card networks or issuers to help boost awareness of contactless among consumers.
Growth Signs
But such naysaying from analysts ignores the near doubling of contactless cards issued this year, to between 60 million and 65 million, plus another 5 million to 10 million in Canada, says Inside Contactless' Walton, who bases the estimates on chip orders. This includes plans announced last spring by U.S.-based financial institution Washington Mutual to issue up to 15 million contactless debit cards this year.
Despite the subprime mortgage crisis and other problems facing the banking industry, WaMu is going ahead with the plan, say sources.
Walton says another major bank will issue contactless cards during the second half of this year, though he declined to say if that bank was Chase reissuing its earlier cards.
"The analysts are just blowing it, (saying) we've got this slow growth," says Walton. "I don't think it's stalled; I don't think it's going to die. The U.S. is too damn big and massive. One of the challenges (is) you don't have an alignment of acceptance and issuance deployment."
MasterCard continues to tout high consumer satisfaction with contactless and says in those cities with a lot of cards in circulation, contactless transactions are significant.
WaMu's decision to roll out contactless cards demonstrates the progress, says Cathleen Conforti, MasterCard senior vice president for PayPass, noting merchant numbers also are increasing. "We're happy with the growth rate we see," she says. "We, of course, want that to continue."
And while mobile phones and other form factors comprise a key part of MasterCard's strategy for PayPass, they are not necessary for the contactless concept to become mainstream, she says.
"Cards and contactless could stand on their own," Conforti tells Cards&Payments. "The benefit of contactless answers all the things [contactless players] say they want–an alternative to cash, speed and convenience."
For its backers, the rollout of contactless cards reminds them of PIN-based debit cards. Critical mass will be years in the making.
But from where others stand, the speed-and-convenience mantra sounded by the contactless card promoters is starting to ring hollow. They believe that without the addition of mobile phones and the new users and applications they will bring, contactless payment will founder. CP
