Contactless Requires More Collaboration

  By a wide margin, merchants most likely to adopt contactless technology in the near future view private-label cards more than any other payment method as drivers of business goals and revenue, a survey of 900 merchants we conducted in December 2005 found. Roughly 35% of the retailers seriously considering embracing contactless payments cited private-label credit cards as top revenue drivers while just 5% cited co-branded credit cards.
  The survey involved merchants of varying sizes in seven industry categories, including gas station/convenience stores, grocery and specialty retailers.
  For banks issuing contactless cards and the card associations that support them, this unexpected result suggests the threat of disintermediation - the conversion of payments from MasterCard or Visa cards to private-label transactions-is reflected in the payment types that merchants value. If issuers and the card associations do not respond to the dominant merchant preference for privately branded cards by working to develop marketing strategies for contactless payments that include merchants, they may find themselves locked out of the transactional income.
  If merchant cards were co-branded with Visa or MasterCard and used radio frequency identification contactless technology, the card associations and/or specific issuers would be able to work with merchants to deploy contactless technology and develop specialized rewards programs to drive usage and foster loyalty.
  A successful example of how a merchant and a card issuer can work closely together to develop a cobranded card is Starbucks' Visa Duetto card. Both Starbucks and JPMorgan Chase & Co., the issuer, gain from the arrangement. And the product itself, a combination of a loyalty-based reloadable Starbucks card and a credit card, stimulates increased customer usage.
  This is the type of card that easily could convert to contactless technology. Lost sales caused by long lines potentially could be regained. And higher card usage equals greater merchant rewards, which, in turn, encourages increased dollar volume.
  Merchants most likely to convert to contactless technology view cash and checks as the most costly payment forms. Most retailers, however, consider checks and cash the least costly payment methods. They view debit and credit card payments, with their related transaction fees, the most expensive.
  For these retailers, conversion to contactless is viewed as a conversion to a more costly system that does not yet make economic sense. They do not view the faster processing times and shorter lines generated by contactless payments as being enough to outweigh the higher transaction costs associated with shifting less-expensive payment forms to credit and debit card payments.
  Widespread adoption of contactless payment methods will not happen until issuers and card networks address the concerns of these merchants who are troubled with the cost of accepting debit and credit cards. The arguments for deploying contactless payments will have to go beyond transaction speed and the conversion of cash transactions. These merchants seemingly have little need for increased transaction speed and are not motivated to convert cash transactions to what they see as more expensive alternatives.
  Bruce Cundiff and Mary T. Monahan are research analysts at Javelin Strategy & Research, a Pleasanton, Calif.-based research and strategy consulting firm focused solely on the financial services and payments industries. They can be reached at bcundiff javelinstrategy.com and mtm javelinstrategy.com.
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