When contactless payment cards trickled into nationwide distribution in early 2005, U.S. consumers didn't embrace or demand them, so retailers didn't accept them. Thus, after an initial spurt of enthusiasm within the payments industry, some experts lowered their projections for contactless adoption _ more than once. For example:
• In 2004, Jupiter Research LLC projected there would be 230 million contactless cards issued in 2007. In 2006, it revised those figures downward by 70%, projecting 37 million contactless cards in the United States in 2007 and 72 million in 2008.
• Jupiter also radically revised its estimates of contactless as a percentage of all card spending: In 2004 it estimated that by 2009, 2.88% of all card spending would be with contactless cards; in 2006 it projected that same figure to be 0.72% - more than a 75% drop.
However, despite their glacial movement in the marketplace thus far, contactless payment systems may be unstoppable. And card Associations are pushing them with gusto.
According to the Smart Card Alliance, as of June 2007, 21.6 million contactless cards have been issued in the U.S. in the past two years. MasterCard Worldwide said it has issued more than 16 million PayPass cards and has more than 55,000 devices at merchant locations worldwide.
Michael Liard, Research Director at ABI Research, estimated there are currently 150,000 contactless payment terminals in 55,000 retail locations in the United States. One reason for the apparent burgeoning use of contactless payments is that American Express Co., MasterCard and Visa Inc. have all issued contactless payment cards and devices based on a single industry standard (ISO 14443).
This means a single terminal can accept contactless products from MasterCard, Visa and AmEx. These contactless payment products - AmEx ExpressPay, MasterCard PayPass and Visa payWave - have paved the way for contactless payments to achieve critical mass.
"At the recent Smart Card Alliance annual conference, we saw that the payments industry is very bullish on contactless payments," said Randy Vanderhoof, Executive Director of the SCA.
"We heard from the card Associations, the merchants, the card manufacturers, the mobile handset manufacturers and the analysts on this subject, and there are very high expectations from all of the stakeholders that contactless payments will continue to grow in the U.S. and internationally," Vanderhoof said.
Only one major card Association, Discover Financial Services LLC, has not yet released contactless cards.
According to Leslie Beyer, Senior Manager of Public Relations at Discover, the company has the contactless payments technology in place, called Discover Network Zip, and has recently completed a pilot program on mobile phones.
The data from the tests hasn't been evaluated yet, nor has the company decided on the best product to offer. "We can't speculate right now on when we will roll out a contactless device, but we have certainly entered the market," Beyer said.
The card Associations have not only invested heavily in the technology, they have been aggressively marketing contactless cards to their users.
MasterCard started running national television advertisements in late 2005 and continues to run contactless acceptance commercials; Visa has just begun a national advertising campaign for payWave.
The major hiccups in the supply chain from card Associations to consumers have been issuing banks and merchants. Bank of America Corp., for example, has run a mobile-phone contactless trial, but only has a handful of cards issued, primarily because of its 2006 acquisition of MBNA Corp.
Citibank has participated in some trials - one being a six-month 2006 MasterCard trial in New York City subway stations - but has yet to distribute contactless cards in any significant numbers.
Some speculated issuers have been holding out because the initial cost of the card - approximately $1, according to the SCA - is costlier than a traditional magnetic stripe card.
JPMorgan Chase & Co., on the other hand, did distribute contactless cards, issuing more than 1 million for trials in Atlanta, Denver, Orlando, Boston, Philadelphia and New York. And other small to mid-sized issuers have taken the leap, like Wells Fargo & Co., SunTrust Banks Inc. and HSBC Bank.
According to Vanderhoof, one of the early challenges to widespread adoption of contactless payments was "changing the infrastructure at the merchant level and timing that to the widespread availability of contactless payment cardholders in each geographic region."
Only about 1% of U.S. merchants currently accept contactless payments - although that figure may be misleading as some merchants, such as McDonald's Corp., have a number of locations.
"The current model in the northeast of a high concentration of both merchants and cardholders is not quite there yet," Vanderhoof said. "But progress has been significant, and further market maturation is inevitable."
David S. Evans, founder of Market Platform Dynamics, presented statistics at the International Quality and Productivity Center Contactless Summit that reinforce Vanderhoof's assessment of varying geographical concentrations of contactless adoption.
Evan's figures show that contactless penetration (as a percentage of all merchant locations) was 0.4% in New York, 0.54% in Boston and only 0.11% in San Francisco. He pointed out that it took 16 years and an aggressive card distribution program for debit cards to account for 3% of all card volume.
And as the number of nationwide merchants accepting contactless payments has risen, the momentum for acceptance has increased as well.
Businesses such as McDonald's, 7-Eleven, Lowe's, Subway, KFC and Walgreens now accept contactless cards.
"I think the egg has hatched," said Andrea Brandt, Financial Services Manager for Meijer Inc., a supercenter chain that combines department stores and groceries, at the recent SCA annual conference.
With 15,000 contactless payment terminals in 181 Meijer stores, Brandt reported a 44% monthly sales lift for customers paying with contactless cards.
By far the most common use is still traditional cards embedded with contactless functionality. But key fobs, near field communication-enabled mobile phones, wristbands and even wristwatches have been developed, tested or launched in major markets.
According to Rosa M. Alfonso, Director of Corporate Affairs and Communication for AmEx, contactless payments are "an emerging area for the entire industry. It's a great functionality for situations where speed and convenience are key."
Alfonso suggested contactless payment would be key for quick service restaurants, convenience stores, gas retailers or transit companies. "You probably wouldn't focus on contactless for places like Saks or Bloomingdales," she said.
As contactless payments become more prevalent, markets which were previously immune to credit or debit card payments open up.
AmEx's pilot program in Utah allowed skiers to ride buses from Salt Lake City to several ski resorts to pay with contactless AmEx cards. The trial was so successful, the Utah Transportation Authority announced plans to implement contactless payment across its full system over the next year.
Transit is a target for MasterCard as well. MasterCard and VeriFone recently rolled out MasterCard PayPass to taxis in New York and Philadelphia, and have a pilot program in Las Vegas taxis scheduled to be completed in 2007. (This program may have a pothole or two to repair. See the accompanying sidebar entitled "Contactless needs a pit stop, cabbies say")
A recent TowerGroup report predicts that by 2009, the total market for contactless micropayments (payments of $5 or less) will reach $11.5 billion. Projections like this have caught the attention of the card Associations. PayPass' brochure, for example, touts that "small-value transactions have long been the last stronghold of cash. But all that is about to change." Signatures are not required for PayPass or most of payWave's purchases under $25, further speeding customer's transactions.
By not requiring signatures on micropayments, Master Card can target both crowded merchant situations - like sports stadiums, for example, where consumers may have previously balked at whipping out a card for a hot dog or a beer in a concession line - and nonstaffed situations like vending machines or airport parking lots.
In the ultimate of cash replacement schemes, MasterCard has announced vending machine trials with Coca-Cola Bottling Co. and Canteen Vending Services to accept PayPass.
According to MasterCard's studies, PayPass is faster than cash in many POS environments - even faster than exact change. Transactions tend to be at least 10% higher when using a card instead of cash.
MasterCard's research concludes that in the U.S., 86% of consumers want to use cash less often, carry less than $20 in their wallets and are comfortable using a card for very small purchases.
AmEx's research proves the same: Based on a three-day sample in its pilot programs, customers got through the line 53% faster with ExpressPay than with mag-stripe transactions and 63% faster than cash.
Also, customers spent between 25% to 33% more with ExpressPay than when using cash.
The SCA cites figures showing the most significant time savings are realized in the drive-thru environment: Twelve to 18 seconds are shaved off purchase times, and contactless readers require less maintenance than traditional mag-stripe card readers.
Critics said to fully realize the potential of contactless micropayments, the card Associations will have to lower interchange rates for those types of transactions - a move no U.S. card Association has announced, although VisaEurope has said it would lower interchange in the U.K.
Others in favor stated that once critical mass of consumers carrying contactless cards and merchants accepting them is reached, the market will explode and will override merchants' objections to paying interchange on low value transactions.
"A significant impact on the further expansion of contactless will occur as more NFC-enabled handsets reach the market beginning in 2008 and 2009, which will be compatible with the more than 40,000 merchant locations already accepting contactless credit/debit cards and devices," Vanderhoof said.
If contactless cards do catch on and become an everyday tool for consumers, it will be a strong finish for card Associations. Whatever the outcome, it will be an event worth watching.
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