Contactless Payments: Smooth Sailing, So Far

  A cup of coffee here, a hamburger there, a fill-up at the gasoline station on the way to work. Customers are starting to use their contactless payment cards at convenience stores, fast-food restaurants and supermarkets throughout the United States.
  Merchants, who will have a lot to say about whether this becomes a common form of payment, are cautiously optimistic. They report that tap-and-go cards and keyfobs do allow customers to pay more quickly, a key selling point for contactless. And they say few of the first customers adopting the technology are having trouble figuring it out.
  "The biggest surprise is the customer acceptance," says Rich Steckroth, manager of new business development at Altoona, Pa.-based convenience store chain Sheetz Inc., whose 318 locations began accepting contactless payment cards in May. "I thought we would have to do a lot more customer education."
  But training and education of store employees need attention, and some stores could benefit if the payment card organizations that support contactless raise their no-signature limits.
  Still, the real test will come when-or if-the early users of contactless technology give way to a far larger second wave of mainstream consumers. The positive early experiences of merchants that accept contactless payment give backers room for hope that the masses will one day accept the technology. This is what early-adopter issuers and "quick-service" merchants are banking on.
  Some 15,000 merchants will accept contactless payments cards by the end of the year, predicts Patrick Gauthier, Visa USA's senior vice president for new product development. About 35,000 are expected by the end of 2006. These merchants hope to shave precious seconds off transaction times, which could improve profits.
  So far, the mood from behind the checkout counter is positive, at least according to interviews with the handful of merchants willing or able to offer details about early experiences with contactless payment.
  Technical glitches have been few. The first wave of contactless customers has shown consumers can tap or wave the cards at readers with little difficulty. However, some who do not have contactless chip cards but have heard about their launch seem to believe they can use regular magnetic stripe cards for contactless payments.
  These early reports are encouraging for issuers. But while they can spend millions on marketing, the success of contactless payment largely will depend on the daily encounters consumers have at the point of sale.
  Merchants keep a close eye on how their customers pay and know that changing consumer behavior is not easy.
  "Customers have a deep conditioning and habit of swiping their card for payment," says Michael Ross, director of marketing strategy and customer financial services for grocer and general merchandiser Meijer. "Switching their behavior will require multiple contactless payment experiences."
  As those experiences mount, some issues loom large for merchants. Certain businesses, especially smaller chains and mom-and-pops, many of which still do not accept magnetic stripe payment cards, will want to see whether contactless payment cards prove themselves as a time saver and business generator. The merchants will also want assurances the payments are secure.
  And there are other, smaller, issues to deal with. Employees must be trained on the little things. This includes not blocking contactless signals by putting a candy-bar display in front of a reader, as happened at Sheetz convenience stores, Steckroth says. Such mistakes could delay the payment process, which, in the hurried atmosphere of a convenience store or fast-food outlet, could lead grumpy customers to shrug their shoulders and walk away from the technology.
  The contactless card garnering much of the attention because it was the first launched by a major issuer is Chase's "blink." The bank introduced it in May, and in October the bank issued 3 million contactless credit cards to Chase cardholders living in Connecticut, New York, New Jersey, Delaware and Pennsylvania. The cards, which will be branded with either the Visa or MasterCard logos and also have a magnetic stripe, will replace cardholders' traditional credit cards, a Chase spokesperson says.
  The October rollout followed Chase's issuance of 2 million blink cards this spring in Atlanta and Colorado. In the latest round, 2 million cardholders in New York's Tri-state region, which includes 481 cities and 11 counties in New York, New Jersey and Connecticut, will receive the cards. About 1,800 merchant locations in the region accept blink, including Duane Reade, Regal Entertainment Group, 7-Eleven Stores Inc., AMC Theatres, CVS/Pharmacy and Sony Style, bank officials say.
  Chase issues cards in the New York region with the Continental Airlines, Sony, United Airlines, Universal's King Kong and Universal brands. Those credit cards will be reissued as blink cards. In Philadelphia, about 900,000 Chase cardholders will receive blink-enabled cards over the next few weeks. Chase says about 1,200 merchants in Philadelphia, Southern New Jersey and Delaware accept contactless cards.
  Since blink's introduction earlier this year, feedback from customers has been positive. "We see them using it on an increasing basis every week," says Tom O'Donnell, Chase Card Services senior vice president. "They're climbing the adoption curve."
  A total 400 merchants in Colorado and Georgia can accept blink, O'Donnell says. Calls to some of those listed merchants in Atlanta found that knowledge and use of contactless payment cards have a ways to go.
  "To be honest, I haven't seen anyone use it," says Robert Jones, manager of a CVS pharmacy store in Atlanta. "We've been accepting blink for a couple months." But a charge slip for a contactless transaction looks the same as one for a magnetic stripe card purchase, so some customers may have paid with blink without his knowing it, he says.
  Training is an important issue in industries targeted by contactless payment backers. Staff turnover is high in convenience stores and fast-food restaurants. Though tenure rates are improving in the U.S. fast-food industry, according to the National Restaurant Association, the median turnover rate for employees and managers was 80% in 2002, the last year for which figures were available.
  Take the 49 Arby's fast-food restaurants owned by The Bailey Co. in Colorado. Each location serves hundreds of customers daily, says Jeffrey Gordan, Bailey's controller. Only up to a dozen customers per store are using contactless cards each day. But 60% of the business in those Arby's comes through drive-through lanes, most of which did not have contactless readers installed as of early October.
  "The big impact for us will be outside," Gordan says. At each of the half-dozen Arby's that did have drive-through contactless readers by early October, approximately four or five customers per day were using their contactless payment card.
  Gordan says he would like to see 20% to 25% of Arby's customers use the tap-and-go cards by the end of 2006. In drive-through lanes, the cards can save from 5 to 15 seconds per transaction (the actual time saved depends on whether the drive-through has a security window or quicker sliding glass). Five to 15 seconds per transaction is a significant time savings that can quickly add up to more business.
  Sheetz is aiming for 5% of its customers to use contactless payment cards by the end of 2006, Steckroth says. Now, less than 1% do.
  Still, even in these early days, some trends are emerging.
  The first is time savings. A contactless payment inside a Sheetz store is running about eight seconds faster than cash and 22 seconds faster than a conventional magnetic stripe card. Outside, at the gas pumps, contactless transactions are only about two seconds faster than other payment cards. Steckroth expects that difference to grow in the winter, as shivering customers merely tap their wallets against the reader instead taking out the cards.
  More Visits
  The second trend is how contactless card customers are paying at Sheetz. At gas pumps, spending levels have not changed. Inside, average purchases made with contactless payment cards are less than purchases made with swiped cards, says Steckroth. He declines to release specific transaction amounts, and the reasons for this spending difference are unclear. But, he adds, customers using contactless payment cards are shopping at Sheetz more often, and, in total, are spending more.
  Meijer, which operates in the Midwest, in August began accepting contactless payment cards inside its 171 stores. As of early October, it was installing contactless readers at gas pumps outside 150 of the stores.
  To justify the investment in contactless technology, Meijer calculated that a contactless card would have to cut seven seconds from a transaction, according to Ross. Though data are rough-transaction times probably are longer than they will be after customers and cashiers get used to the cards-Meijer projects the time savings will "settle in the low double digits," Ross says.
  The early experiences with contactless payment at Meijer offer some lessons for card issuers and payment schemes.
  Ross says Meijer stores in cities with contactless cardholders are experiencing the highest use of the technology. "While that seems obvious," he says, "the message we are sending to (issuers) is that when a customer receives a new card, the usage is nearly immediate. The success for all retailers will be dependent on banks moving fast with card replacement."
  Another lesson has to do with no-signature limits. Most contactless payment efforts revolve around daily, low-value purchases, such as coffee and fast food.
  In general, a cardholder can make a purchase of up to $25 without having to sign for it. Visa, for instance, has a $25 no-signature limit for all contactless transactions, according to a spokesperson. MasterCard PayPass also has a $25 limit for most merchants, although it allows no-signature PayPass transactions of up to $50 at parking garages and $35 at movie theaters.
  Rising Limits
  But Meijer customers spend more than $25 per visit on average, Ross says. A customer using a Meijer Platinum MasterCard with a contactless chip has a $50 no-signature limit. The rest have the $25 limit. "Raising the signature limits would allow more customers to experience the true time savings and benefits associated with contactless payments," Ross says.
  No matter what happens with signature limits, some merchants are anxiously awaiting the use of contactless payment cards by the next swath of presumably less techno-savvy consumers-those shoppers standing in the back of checkout lines, watching cards being tapped against readers.
  "The learning curve will come into play a little bit later," says Sheetz's Steckroth. "The second wave of consumers will need a little help understanding the difference" between contactless and regular magnetic stripe cards. He says it might be another eight months to 15 months before that second wave tries out the new way to pay.
  Another group watching the early returns are merchants who might one day be pressured to adopt the technology. Many remain unconvinced that contactless payments are worth the investment. Putting in a terminal can cost between $100 and $150.
  For a large pharmacy chain such as CVS, whose 5,400 stores have an average of eight contactless payment terminals, the investment runs into the millions, says Jonathan Roberts, CVS's senior vice president for store operations. The potential payoff is a 20% to 30% uptick on purchases, which average $10 per ticket.
  Many merchants, especially those selling fast food, also are not yet accepting any type of magnetic stripe cards.
  One in five quick-service restaurants does not accept credit or debit cards, according to a 2005 report from the National Restaurant Association. Winning over these merchants likely will be more difficult. They not only would have to adopt contactless technology with its costs and learning curve, but install new card-acceptance infrastructure and pay transaction fees for the first time.
  Linda Lipsky, a Pennsylvania-based restaurant consultant who works with smaller retailers, quick-service and other food businesses, says her clients considering contactless payments likely will worry about cash flow. Accepting payment by cards means a delay in money getting back to the merchant. That is not a problem for the likes of McDonald's, but for a mom-and-pop it can be a significant hurdle.
  Naturally, card organizations such as Visa are trying to convince these smaller merchants that the investment in contactless payment and cards in general can pay off. Visa and MasterCard have made a big push to convince fast-food restaurants to accept cards in recent years, and Visa says spending on its cards at fast-food outlets increased by 67% last year to $10.8 billion from the same period in 2003.
  In any case, the smaller operations are waiting to see what happens with the big chains before diving into contactless payments, Lipsky says. And the merchants who are taking the cards want more cards out there.
  "My biggest concern is getting issuers to issue the cards," Steckroth says, adding that the recent rollout of contactless debit cards from Ohio-based KeyBank will provide even more contactless cards in markets Sheetz serves.
  Additional rollouts of cards and tokens certainly will play a major role in the wider merchant acceptance of contactless payment. Much depends on those few seconds saved in checkout lines, in not blocking readers with product displays, and in making sure consumers can pay quickly for that cup of coffee and get on with their lives.
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