The next generation in payments

Contactless payments are continuing to rollout around the world, but how fast, where and why? If we look at how fast, the rapid adoption and take-up by consumers and merchants has outstripped any other payments technology implemented in the recent past. At the end of 2007, over 33 million contactless cards and devices had been issued worldwide, with acceptance at more than 95,000 merchant locations. In the US, issuers such as Wells Fargo, KeyBank, Bank of America, Chase, Citibank, US Bank and HSBC are putting contactless credit and debit cards and fobs into the hands of consumers.

As to where by types of merchants, acceptance is now expanding into new categories. While initially adopted by quick service restaurants, convenience stores, pharmacies, theaters and sports venues, grocery, vending, taxis and office supply superstores are now accepting contactless payments, increasing the speed and convenience of their check-out processes. But perhaps the most interesting question is why the financial payment card issuers are moving to contactless technology? The answer lies in the benefits that issuers see from differentiating their products, realizing increased usage and activity from consumers using contactless cards, and replacing cash for an increasing number of transactions. Let's look at some of the key business drivers for issuers:

Contactless payments respond to the consumer desire for cashless payment and replace cash transactions. Consumers are continuing the shift from paying with cash to paying with debit or credit cards. According to MasterCard's Global Cash Usage Survey, a majority of respondents (56 percent) believe that one day the world will be a cashless society where credit and debit cards will replace cash and checks for payments and two-thirds of respondents use cash less often than five years ago to make purchases. Contactless payment is fast and convenient for consumers -- promoting the use of credit and debit payment for small-value purchases.

The opportunity for issuers is enormous. According to Datamonitor, $724 billion in cash was spent worldwide on transactions under $25 in six contactless retail sectors in 2004. Contactless payments provide issuers with the opportunity to grow transaction volumes by tapping into this low-value cash payments market and expanding credit and debit card use to new merchant categories.

Consumers use contactless payments devices more frequently and spend more with their contactless payment accounts. Consumer behavior with contactless credit and debit cards changes, providing increased revenue to issuers. According to MasterCard, cardholders increased overall usage of their PayPass card by 27 percent -- both spending more with their PayPass card and using it more often. MasterCard has also reported that PayPass is a proven tool to convert inactive accounts. MasterCard's survey also found that 49 percent of respondents were likely to use a contactless card if provided by their financial institution. Consumers love the speed, convenience and security of contactless payments. This provides incentives to consumers to move their contactless payment card to 'top of wallet’, enhancing their loyalty to the issuer.

Contactless payments present issuers with a tailor-made opportunity for clear differentiation. Being able to offer “the latest thing” allows issuers to further differentiate their products, drive new account acquisition and strengthen customer loyalties. The variety of form factors in which contactless payment devices can be available also supports differentiation. Issuers can also collaborate with merchants on payment products that blend specific features and packaging (cards, tokens, mobile phones) and target different customer segments with very particular requirements for the shopping experience.

Contactless payments provide a payment platform for future expansion. Contactless payments open up new merchant categories accepting credit and debit payment, expanding available transaction volumes for issuers. Contactless payments are now being used not only at traditional in-store locations, but also in taxis, on toll roads, at vending machines and on subways and buses. One exciting new market is in transit. As transit agencies upgrade their infrastructure to accept contactless fare payment, opportunities are emerging to use traditional contactless credit and debit cards for paying fares on buses and subways. This offers opportunities for collaboration between the financial and transit industries, as well as increased transaction volume and increased customer convenience.

The day is also coming when customers will be able to use Near Field Communication (NFC) technology in their mobile phones for payment. The contactless payments infrastructure that is being put in place today by issuers, merchants and payment processors will be able to accept NFC-enabled phone payments as they roll out. This gives issuers even more opportunities to differentiate their products by offering mobile payment capabilities to their cardholders. With these compelling benefits, it's no wonder that leading issuers around the world are moving to issue contactless payment cards and devices. That said, however, it is critical for issuers considering contactless payments to plan their implementation carefully -- as they would any other change to their product portfolio.

Considerations for Implementation. The first step for an issuer to consider is determining the size of the target market and its willingness to accept contactless payments. Also important is identifying the drivers for profit and loss and reviewing subjective factors that could drive the business case. For example, will contactless enhance acquisition of new accounts in a target demographic? Does contactless give the issuer a strategic or competitive advantage in its market? Is the issuer planning another upgrade to its products that contactless could be coupled with, such as implementing dynamic CVV? Are merchants in the issuer's geographic market moving to accept contactless? Are there merchant or other partners who will join with the issuer in the contactless rollout?

Implementation planning should take into consideration how to monitor contactless transactions and accommodate different processing requirements. For example, BB&T reported that they implemented a new BIN for reporting purposes and needed to do some programming to identify the new point-of-sale entry mode and adapt their card management system for card issuance and reporting. The use of the Application Transaction Counter (ATC) security feature also changed BB&T's reissuance process if a card is damaged.

Customer education is also critical. The card package sent to the consumer should include detailed usage instructions and highlight the card's contactless capability. Prominently displaying the contactless brand on the card helps consumers be aware that their new credit or debit card incorporates contactless technology. Marketing and promoting the card's contactless capability also increases consumer awareness and usage. For example, training branch and call center staff to help customers find where to use their contactless cards can help drive usage. BB&T also reported that doing a pre-mailing to prospective cardholders, doing outbound calling for activation, and keeping call center staff actively involved can help with implementation.

Conclusion
Industry sources have stated that contactless payments represent the most important card payment innovation in the last decade. The true driver for contactless payments is the fact that they deliver benefits to everyone in the payments value chain. Consumers like the speed, convenience and security. Merchants see faster transactions, increased spending and increased loyalty. Issuers are able to capture additional revenue by tapping into the cash payment market and by seeing increased activation and use by cardholders. Contactless payments bring in a new era of payment globally, truly delivering a winning platform for issuers to both realize short-term benefits and position their business for long-term strategic advantage.

About Randy Vanderhoof
Randy Vanderhoof is Executive Director for the Smart Card Alliance, a not-for-profit, multi-industry association working to stimulate the understanding, adoption, use and widespread application of smart card technology. Through specific projects such as education programs, market research, advocacy, industry relations and open forums, the Alliance keeps its members connected to industry leaders and innovative thought. The Alliance is the single industry voice for smart cards, leading industry discussion on the impact and value of smart cards in the U.S. and Latin America. For more information please visit http://www.smartcardalliance.org.