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Contactless payments: Are they for real?

By Ken Boekhaus

You've probably seen the TV commercials and heard the news reports. Contactless payments have arrived. But, are they for real or simply empty marketing hype?

Recently, MasterCard International has led the way to general consumer contactless payments with the PayPass brand, closely followed by American Express (AmEx) Co.'s ExpressPay. Visa's Wave brand is now playing catch up.

In 2004, MasterCard conducted pilots in Orlando, Fla. and Dallas, Texas, and AmEx conducted one in the Phoenix, Ariz. area. Only a few select pilot results have been published. Although most of the benefits documented are for card issuers and consumers, the benefits claimed for merchants are faster transactions, larger tickets and improved customer convenience. Let's evaluate each one:

Faster transactions?

MasterCard has reported that paying with PayPass is 12 to 18 seconds faster than paying with cash, but using a magnetic stripe credit card (without a signature) versus cash results in a similar time savings. The only speed advantage for contactless is that consumers tap a card, key fob or phone rather than swipe a card. This difference, however, is only nanoseconds.

A frequently quoted side benefit is that consumers don't have to take their contactless card out of their wallet to use it. That's only true if one contactless card is in the wallet. If the card reader detects more than one card, it will read none of them.

Larger tickets?

The claims of higher tickets are related to reports that consumers tend to spend more when paying with credit or debit cards than when paying with cash. I have seen no evidence that shows an increase in merchant average ticket for payments made with contactless cards versus magnetic stripe cards.

More convenience?

In terms of consumer convenience, the difference between a contactless card and a mag stripe card is minimal, except in the case of a drive-through. Height variations between a sports car and a 4X4 truck are enough to make swiping a credit card through a POS terminal difficult. The contactless reader, however, can read a card held at any angle as long as consumers hold their card in the read zone.

I think that the merchant benefits touted are more hype than reality. Issuers, not acquirers, are driving contactless payments, and that is why MasterCard is spending millions of dollars to break the chicken-and-egg syndrome: Merchants don't want to buy contactless readers until a sufficient card base exists. Issuers don't want to issue contactless cards until merchants can accept contactless payments.

Are the millions spent by the card Associations and issuers enough to establish contactless payments, or will they become another American Express Blue - all marketing hype with little or no use of the technology?

It's not a forgone conclusion that contactless payments will take hold. But my experience to date is that only about half of installed contactless readers are actually functioning, and many cashiers don't know what a contactless card is. Yet, the banks are issuing millions of the cards. How many will be used solely as mag stripe cards and how many as contactless cards? That remains to be seen.

Are cell phones the solution?

Incorporating payment technology into cell phones and PDAs holds the most promise for contactless; however, deployment is often a stumbling block in the introduction of new form factors.

The credit card industry has developed an efficient infrastructure for delivering bankcards to consumers, but new form factors such as key fobs and cell phone covers muck up this infrastructure. But if contactless payments are built into cell phones or PDAs, credit card data can be issued wirelessly to these devices.

Companies such as ViVOtech, Motorola and others have developed electronic "purses" for use in cell phones and PDAs that store more than one credit card account number and support stored-value programs.

A stored value purse is the most likely candidate for displacing cash micropayments because the interchange rates for credit and debit card micropayments are proportionally higher.

What does the future hold for contactless payments? I don't know. Certainly the card Associations are having success with the large fast food chains by heavily subsidizing contactless equipment. But will smaller merchants be as quick to embrace the concept without subsidies? I think not.

Many merchants will balk at buying contactless readers, especially if contactless cards also have mag stripes. However, if cell phone contactless payments catch on, the mag stripe issue becomes irrelevant.

Our strategy at EXS could be described as defensive. We're not ready to bet against the millions being spent by the Associations and issuers to promote contactless payments. Therefore, we are working with MasterCard on a contactless program so we can be ready should merchant demand for contactless payment acceptance increase. I think many others will also take a wait-and-see attitude.

Ken Boekhaus is Vice President, Marketing and Business Development for Electronic Exchange Systems (EXS), a national provider of merchant processing solutions. Founded in 1991, EXS offers ISO partner programs, innovative pricing, a complete product line, monthly phone/Web-based training, quarterly seminars and, most of all, credibility. For more information, please visit EXS' Web site at www.exsprocessing.com or e-mail Boekhaus at kenb@exsprocessing.com . EXS is a registered ISO/MSP for HSBC Bank USA, National Association.

Article published in issue number 060301

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