Big trouble for little cash payments

The rollout of contactless payment technology has begun in earnest. Is this the start of a new chapter for the payments industry – and the beginning of the end for cash? By Neil Davey

Plastic payments have proliferated during the short lifetimes of credit and debit cards. By the end of the 1990s – less than 50 years since the launch of the inaugural credit card – US consumers collectively owned around 1.4 billion cards, charging over US$990 billion in goods on them every year. The payments market has been subject to some major plastic surgery over the past few years and the face of the industry has been changed forever. Nevertheless, one wrinkle remains to be ironed out – small cash payments. Each year, more than 354 billion cash transactions occur in the US for less than US$5 at the physical point-of-sale, according to Ipsos-Insight, representing US$1.32 trillion in aggregate revenue. The payments industry has wrestled with the challenge of increasing merchant acceptance and consumer comfort with using cards for lower value transactions for several years. And now they may finally have found the solution.

Last year, the launch of contactless payment technology across North America began in earnest. Using radio frequency technology, contactless cards enable consumers to make a payment by simply waving or tapping their cards on or near the card reader. Within half a second, the payment is verified and the transaction is completed. Cardholders are not required to provide a signature for most purchases under US$25, and contactless merchants do not have to provide a receipt for purchases under US$25 to cardholders, unless requested. Leading banks have begun issuing millions of contactless credit and debit cards to consumers, whilst retailers are installing readers that can accept contactless payment and are integrated with point-of-sale systems.

The momentum is building and the deployment of contactless infrastructure is the most rapid witnessed in recent memory for an emerging payments product. By the end of the first quarter of 2006 there were in excess of 10 million American Express, MasterCard and Visa branded contactless devices in circulation in the US – from card-based to other form factors such as key fobs and miniature cards – with acceptance reaching over 160,000 terminals in 30,000 merchant locations. Visa has described its Visa Contactless as “one of the most rapidly adopted payment innovations in Visa history.”

Meanwhile, the number of banks launching contactless products continues to rise, following in the wake of Chase Bank, which began a full commercial launch of its ‘blink’ contactless technology back in summer 2005. “Chase cards with blink have been very successful,” emphasizes Tom O’Donnell, Senior Vice President of Chase Card Services. “In the past year, nearly seven million blink cards have been issued and over 25,000 merchants nationwide now accept contactless payments. In addition, we continue to see consumers using blink with double digit usage growth month over month.”

Quick transactions
Certainly contactless technology would appear to present an attractive proposition for both merchants and consumers, particularly to those in sectors where speed is important, such as fast food restaurants, pubs and bars, convenience stores and petrol stations. The Smart Card Alliance recently commissioned a consumer attitude survey regarding how users perceive the application of contactless technology for payments. “The survey indicates that there is a strong interest in having contactless as an option for the payments that they do, particularly for speed and convenience in locations that they want to get in and out very quickly,” suggests Randy Vanderhoof, Executive Director of the Smart Card Alliance.

“Speed is a cultural issue that is predominant here in the States – everybody is in a hurry, people hate to wait in line and they seem to frequent stores and retail establishments that contribute to that lifestyle of getting things fast and getting things easy. This is a product that fits that lifestyle. Also, the younger generation are increasingly using cards in place of cash for their day to day purchase and so this is a product that also fits that trend as well, being able to have a payment mechanism that can go down into the under $20 range for consumers that don’t want to use cash.”

The desire for quicker and easier transactions was precisely the reason why debit cards made major inroads into cheque use 10-15 years ago, so contactless technology is in pretty safe territory when it comes to winning over the consumer. In addition, studies also indicate that consumers will go back to stores more frequently if they enable rapid service and consumer throughput via contactless technology, and also spend more money each time they do so, according to Kieran Hines, Analyst, Cards & Payments at Datamonitor plc.

And, as he highlights, there are other benefits for merchants. “There are ‘hidden’ costs involved in accepting cash as well as physical costs that are borne by merchants,” he explains. “If someone pays by cash, it has to be counted, stored and taken to a bank, so it has to be kept securely and then paid into an account as well. These costs add up at each stage involving the cash payment process and for that reason sometimes the cost of accepting cash isn’t very transparent for a merchant whereas the cost of accepting a card is very clear because the amount that a merchant receives following a card payment is the purchase price less percentage. What contactless payments allow the merchants to do is remove some cash from their systems, replacing some of that high-cost with a lower-cost means of payment.”

Frenzy of activity
Unsurprisingly, however, the biggest beneficiaries of a shift away from cash towards contactless payments are arguably the card issuers themselves. Contactless payments are an ideal opportunity to both add value to customers and segue into the lucrative low-value payments sector. “It is a product differentiator for them,” adds Vanderhoof. “The card market is extremely competitive right now, and trying to get customers and keep them for a long time is proving very challenging for financial institutions. They have a high cost of acquiring new customers and at the same time it is very expensive if they lose that customer because another company comes in and offers a lower price rate on their card or offers some other benefit. So one of the drivers for the issuers has been to come up with something unique and different that other banks don’t have. The early adopters have the advantage – like Chase with the blink card – they offer something that their competitors don’t offer, which is a really good strategy to increase market share.”

“The biggest benefits are for the card issuer,” adds Hines. “At the moment cards aren’t used for very low-value payments very often because consumers have seen it as a bit of a hassle using cards for low-value payments and often merchants don’t accept cards for small payments. Cash is still very important for making low-value payments compared to cards at the moment, but contactless payments will be a way for issuers to expand their share of the overall payments market,” says Hines.

Keen to seize the opportunity, there has been a frenzy of activity from issuers. American Express has started nationwide issuance of Blue Cards boasting ExpressPay contactless payment technology; Citibank has announced that it is to issue 2.5 million debit cards and key fobs with MasterCard PayPass contactless technology; and elsewhere Keybank has revealed it will be replacing all of its debit card portfolio with contactless cards. There are even more ambitious plans to attack new markets lined up for the future.

“Because blink is a feature of the Chase card product, we continue to see increased usage and new opportunities to expand the merchant acceptance of contactless cards, including at sports stadiums, vending machines and taxicabs,” says O’Donnell. “Acceptance will continue to move beyond large, national merchant chains and reach into the smaller, local locations. Also, we believe contactless payments will be accepted in other places where speed and convenience are essential and become the way consumers pay for goods and services. We also continue to test other contactless payment capabilities for consumers, for example, enabling your mobile phone to pay for items.”

Fastest growing payment innovation
And it isn’t just the US. Although America may boast the biggest market for contactless payments, there is significant activity elsewhere around the globe. Europe offers great potential for card issuers, with markets such as the UK and Germany home to around €40 billion of low value cash transactions every year. After tackling expensive regulatory demands in recent years, the industry is hungry to develop new products and contactless is being seen as just the ticket. The Royal Bank of Scotland leads the pack in the UK where it has been road-testing contactless card payment technology for several months. But numerous other banks are now also readying their own pilot programs as excitement builds.

In Asia, meanwhile, contactless payments have already been deployed in Malaysia, Singapore, Japan, South Korea and Taiwan, with Japan the largest market for contactless payments in the region. Globally, the push towards contactless is gathering momentum. “You can see that there has certainly been a lot of consumer enthusiasm for it,” says Hines. “And the card issuers have invested a lot of money into raising awareness and putting the infrastructure in place for this to be accepted. The signs are that it has been successful so far.”

And the signs are also therefore ominous for the future of cash. Can the card issuers succeed in grappling the last stronghold free of plastic payments away from cash? Certainly the speed that contactless payments have grown from early trials in 2002 to full commercial launches in the last 12 months demonstrates the strength of the technology’s proposition to card issuers, merchants and consumers.

“The United States market is a huge market, and therefore it will take many years before we have a total adoption of contactless payments,” says Vanderhoof. “However, that being said, the people in the payment industry are confident that this is a trend that is going to continue to expand and grow and that this is the fastest growing payment innovation that has ever taken place in the United States. It is faster than the ATM adoption, it is faster than the contact-based smartcard programs that were implemented and they have seen much quicker adoption both from the issuing bank’s perspective as well as from the merchant’s acceptance perspective compared to any other payment innovation that they have implemented.”

Nevertheless, Vanderhoof believes that cash payments won’t roll over and die that easily. “I think we are going to continue to move towards less cash and more electronic payments, but I don’t think we are ever going to eliminate cash entirely.”

Hines agrees that talk about a cashless society is extremely premature. “It is certainly something that may happen but it is not going to happen any time soon,” he concludes. “There are a large number of small traders that don’t have the facilities to accept cards – for instance flower sellers by the tube station – and they are not going to accept contactless payments anytime soon. They don’t have the facilities. But certainly what we are seeing is that there is a greater volume of payments moving away from cash and other forms of paper-based transactions, particularly checks, into electronic forms simply because they are quicker and more convenient for consumers to use and also there is a lower cost in many cases for merchants of recipients to accept.”

It seems that for the foreseeable future cash will still have a place in society. But with the creation of contactless payment technology promising big changes for small payments, it may not be too long before cash is out for the count.

Establishing contact
FST spoke with Tom O’Donnell, Senior Vice President of Chase Card Services and Brian Triplett, Senior Vice President of Emerging Product Development at Visa USA, about their respective contactless offerings – and how contactless technology will impact the market.

FST. What is it that is proving most appealing about your contactless cards to consumers?
TO’D. Consumer feedback about Chase cards with blink has been very positive. Consumers have seen that blink is safe and secure, easy to use and speeds them through checkout lines more quickly.

BT. Increasingly, consumers want to pay for everyday purchases using electronic forms of payment. Contactless technology enables cardholders to pay for everyday purchases under $25, like a cup of coffee or lunch, by holding a contactless card in front of a POS reader – no signature or pin required. For consumers speed is key, as is the convenience of not having to carry cash. Additionally, cardholders like the security of having control over their card at all times, and not having to hand it to a clerk.

FST. Why are merchants throwing their weight behind it?
BT. For merchants, contactless cards enable employees to focus on customer service and reduce transaction time for small ticket purchases. Clerks can concentrate on fulfilling orders, moving customers through lines faster – especially at merchant locations where speed and convenience is critical like fast food restaurants, movie theaters, and at the pump. Merchants also benefit by reducing costs associated with cash management.

TO’D. Merchant feedback states that contactless payments increase the throughput of customers at the point-of-sale, meaning that they can check out customers more quickly during their busy times. And merchants have indicated that customers that use blink visit their stores more frequently. Both of these factors increase customer loyalty to that particular merchant location and increase sales.

FST. How are card issuers expecting to benefit from increasing adoption of contactless payment technology?
TO’D. We want to offer Chase cardmembers new places to use their Chase cards and provide all the benefits and features that make the Chase card the primary card in the wallet. Research indicates that customers become loyal to the card that they use most frequently because they view that particular card as having the best combination of value, like rewards and ease of use, among other factors. By building loyalty, we will see the benefits associated with a satisfied and long-lasting customer.

BT. Contactless technology enables cardholders to use Visa at more merchant locations than ever before and improves the cardholder experience by reducing transaction times. In addition to improved cardholder satisfaction and retention, issuers view contactless cards as a way to differentiate themselves from competitors by providing new features and benefits to cardholders.

FST. Overall, what are your thoughts on contactless technology’s present success and what do you forecast for its future?
TO’D. We believe we’ll continue to see an increase in the number of consumers using contactless cards as well as an increased number of merchant locations accepting these payments. Consumers are continuously looking for ways to simplify their lives, including the way in which they pay for their everyday purchases. They are demanding easier and faster ways to pay and moving farther away from carrying cash and fumbling for change. With the introduction of blink, consumers realize that they can now make any purchase – even purchases historically made with cash – easier and more convenient.

BT. Contactless has seen one of the fastest rollouts of any new card technology. We believe contactless has been extremely successful to-date and will continue to gain momentum in the coming years. We think we are moving toward a cashless society. US consumers spend $1.2 trillion in cash and check expenditures in 2005 – a number that is rapidly shifting towards electronic forms of payment.