To Ubiquity and Beyond

Compared to the adoption of credit cards by U.S. consumers, contactless payments are being embraced at warp speed. That’s because consumers are notoriously impatient at checkout—and because consumers also love to embrace technology that makes their lives easier and more convenient. Contactless payment systems satisfy all these desires.

“It took almost 40 years for 75% of the U.S. population to become equipped with credit cards and almost 18 years for 75% to 80% of merchant POS locations to have PIN pads,” noted Gerritt Kerkstra, senior VP of acquirer relations at MasterCard. “By comparison, after only three years contactless is already outpacing that growth.”

At the end of the first quarter of 2008, MasterCard’s contactless brand, PayPass, was in 109,000 merchant-equipped locations in 24 markets around the world.

INSIDE Contactless, provider of the smart microprocessor chips that enable tap-and-go payments, recently announced it had shipped 50 million chips into U.S. and Canadian markets since introducing the technology to North America in 2005. In addition to MasterCard’s PayPass, INSIDE also provides chips for Visa’s payWave contactless solution, American Express’ ExpressPay and has been tapped by Discover to provide chips when it deploys contactless on Discover-branded cards.

“In 2005, 10 million contactless cards were issued into the North American market, followed by 18 million in 2006, and last year the number rose to 34 million,” reported Charles Walton, executive VP of payment at INSIDE. “This year we’re going to hit around 60 million cards. It’s not a rocket ship, but certainly a steady growth rate and I think in 2009 we could see close to 100 million contactless cards in the North American marketplace.”

At what point will contactless payment become ubiquitous?

Walton predicts it will take 10 years from the initial introduction, making 2015 the year merchant POS systems could expect to be pretty well tapped in.

Early adopters have been retail environments such as c-stores and fast-food restaurants that typically have lower-ticket sales and a heightened need for speed at the point of sale.

“The contactless proposition is not as strong for a Neiman Marcus or Bloomingdale’s, although both interesting and somewhat surprising has been the deployment of contactless at multi-lane retailers like Office Depot and Petco,” noted Walton.

“The driving force behind contactless has been to produce a more streamlined experience so customers move through the lanes faster,” Walton continued. “A broader trend, however, is the security aspect. It has become relatively simple for someone to replicate the information stored on a card’s magnetic strip, but the same is not true for information on a microprocessor chip. It’s orders of magnitude more difficult to breach a chip.”

MasterCard’s strategy for deployment has taken a totally different tactic. “We’re focused on POS locations that typically have cash transactions because contactless provides an excellent alternative to cash,” said Cathleen Conforti, senior VP, global PayPass.

Merchants with drive-through lanes, such as fast-food restaurants or coffee shops, are perfect examples of cash-centric POS services that would benefit from contactless terminals. Pharmacies with drive-through services are another logical candidate to offer contactless payments.

In addition to deploying contactless for traditional credit- and debit-card accounts, chips are also being added to prepaid debit cards, making contactless an equally viable solution for the unbanked or under-banked consumer.

“Another trend we’re seeing,” observed Walton, “is that some banks and merchants are using the contactless cards to take advantage of value-added opportunities. A microprocessor chip is quite powerful and can store large amounts of data, which makes it ideal for co-branding.”

For instance, an airline frequent-flyer number could be included on the chip so points are added when the card is used at certain merchants. Walton also suggested that the added data capacity on a chip provides an opportunity for retailers to create more personalized, customer-friendly services.

“A coffee chain might use the chip to track a customer’s regular preferences,” he noted. “Or, a retailer like Barnes & Noble that has a membership club for discounts could automatically combine the member ID and a credit account in the chip.”

INSIDE is also working with some retailers to implement contactless chips on their private-label cards, although none have publicly announced this. “Retailers have begun to see the value in self-deployment and in some cases are paying to add contactless readers at the POS, for all the benefits we’ve discussed as well as to avoid the interchange fees charged by Visa and MasterCard,” Walton noted.

What does the future hold? Probably less plastic and more variety—contactless chips are already being deployed in key fobs, wristbands and mobile phones, as well as stickers that contain the microprocessor chips and can be applied to existing mobile phones. Walton noted these are particularly relevant and popular with Gen Y shoppers.

As contactless starts to approach ubiquity in the bricks-and-mortar space, one has to question if there are opportunities to tap-and-shop online.

Walton acknowledged the concept of tap-and-go e-commerce is “really interesting.” However, he advised, “Incorporating reader chips into PCs is a long-cycle process and not one that we are likely to see in 2008 or 2009. What we are more likely to see in the near term is a contactless reading function incorporated into a USB device. The USB plugs into a keyboard, laptop or PC enabling the use of a contactless card to conduct the transaction over the Internet. Although we are engaged in this process now, we are not ready to deploy it yet.”