Contactless Cards Making Inroads

CU360
September 18, 2007 | COMMENTS

Contactless cards are starting to replace cash for small transactions. While the logistics of this evolution have been hazy, new developments are bringing the process into sharper focus.

Last year, there were $1.3 trillion in cash transactions for purchases of less than $5, according to Mark Friedman, president and CEO of Peppercoin, a Waltham, Mass.-based small payments technology company. Less than 1% of those transactions were conducted by card. One way for financial institutions to get a larger share of that $1.3 trillion is with contactless cards, Friedman tells Bank Systems & Technology .

Consumers are becoming more willing to make those small purchases with contactless credit cards, according to a recent survey from Peppercoin and market-research consultants Ipsos Insight. More than 50% of survey respondents would use contactless cards to buy groceries, items from fast food restaurants or corporate cafeterias, or gasoline. More than 40% would use the cards to pay for convenience store items, transit fares, coffee, or parking, Peppercoin reports.

Growth Predicted

Last year was "a big year for the contactless payment industry," says Boston-based Celent. More than 30,000 merchant locations in the U.S. are now capable of conducting contactless transactions, and more than 13 million contactless devices are in the hands of consumers, Celent says.

Celent predicts that contactless payments will capture 15% of the market by 2011. While the technology behind contactless cards can be embedded in many objects, including watches, key fobs, and mobile phones, "consumers are more accepting of contactless devices packaged like a standard credit card," the firm's report noted.

Among the financial institutions that have issued contactless devices are American Express, Bank of America, Chase, Citibank, KeyBank, and Wells Fargo.

Visa also plans a significant advertising campaign for later this year to introduce its contactless card products to the mainstream. The campaign will represent a push for the new technology, with a focus on how consumers can easily understand and use it.

Chase has issued over 7 million contactless devices, with the "blink" cards now a familiar name in the area of radio frequency identification technology. In general, the contactless payment works the same way as a traditional credit card payment, explains Tom O'Donnell, Chase senior vice president. "Aside from the front end, the rest of the transaction works the same, and all of the associated economics are the same as a traditional credit card payment," he says.

For its contactless program, Chase partnered with Visa and MasterCard, and worked closely with large merchants where consumers would be most likely to use contactless cards, including 7-Eleven, CVS, and Walgreens.

Over the past year, use of the blink cards has increased steadily, reports O'Donnell, who says the toughest part of gaining acceptance was convincing consumers they could use their cards in a new way. "The functionality of credit cards hadn't changed in 30 years," he points out.

Wells Fargo became the second card issuer to get on Visa's contactless payments platform when it began to distribute 400,000 contactless cards to its customers in mid-2006. The initial rollout included existing Wells Fargo customers who are up for card renewal, a few key demographic areas, and the bank's college population. "We definitely see this as an opportunity to make faster, more convenient, and safer purchases," says Peter Ho, Wells Fargo vice president.

Merchant Buy-In Looks Promising

In the U.S. , most of the focus on contactless card acceptance has been on the consumer side. Equally important is an emphasis on merchant acceptance, and one way to do this is to reduce processing costs for retailers.

Peppercoin offers an "intelligent aggregation" program that allows a merchant to hold payments open. For instance, if a consumer buys a $2 cup of coffee every weekday from the same store, instead of sending the $2 charge daily, the merchant can hold the transaction until Friday. That way, instead of the 25-cent processing fee on each transaction, the merchant would be charged 25 cents for the bundled transaction of $10.

Boosting customer profitability is another way to entice merchants, says Friedman. To entice customers to spend more using contactless cards, Peppercoin offers reward programs embedded along with its contactless cards. It also offers a prepaid, stored-value option that allows for a reward tie-in when consumers put money on their cards.