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Issuers look to future with contactless credit cards

Card companies look to technology, but consumers balk

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When credit card executives and industry analysts look at the future of credit cards, they see no swiping.

They see consumers tapping fobs. They see cameras that scan retinas or faces to identify you and swiftly ease your purchase. They see cellphones paying for snacks.

Now all they have to do is get the darn American consumers and business people would pay attention to their visions.

New credit card technology is being introduced in dribs and drabs, but Americans stubbbornly stick to their "dumb" plastic cards (as opposed to the "smart" cards in widespread use elsewhere in the world). But that new technology is making occasional inroads.

At Lincoln Financial Field, home to the National Football League's Philadelphia Eagles, a separate line enables those consumers with "contactless" credit cards to purchase food and drinks quickly -- lessening the time spent away from their seats.  The credit cards are embedded with radio-frequency chips that let fans pay by tapping, or waving the card in front of, specially equipped readers.

Contactless credit cards, which aim to spur consumer spending by making the use of plastic easier than paying cash, are the most apparent sign of a transformation reshaping the card industry.  Credit card execs hope to reignite profit growth via radio-frequency cards and other devices to capture more of the $4.4 billion in purchases Americans now make with cash and checks.

Industry estimates say that more than 5 million contactless cards will be issued by the end of 2008, according to MasterCard. But such industry estimates have been notoriously inaccurate, as Americans remain fickle when it comes to some new technology. Consumers have been reluctant to change the way they have been paying for decades, and without consumer demand, merchants haven't been willing to pay for the costly new devices that would be required for the change. 

Additionally, consumer advocates have raised concerns about the security of radio-frequency payments.

Nevertheless, change seems to be afoot.  The use of cash and checks accounts for 45 percent of consumers' monthly payments, down from 57 percent in 2001 and 49 percent in 2003, based on research from the American Bankers Association and Boston-based Dove Consulting.   

The next proving ground for new technology is micropayments -- small transactions that until now have been a stronghold for cash.

U.S. consumer purchases of less than $15 account for more than $1 trillion in annual spending, but consumers use credit cards for less than 1 percent of that total, Visa reports. 

Speed and convenience promised
Banks say that the new contactless, radio-frequency credit cards are faster and more convenient for both consumers and retailers, helping them skip the steps of making change or bothering with signed receipts.  Merchants often do not ask for a signature for a purchase under $25, and there is no need for consumers to hand over their credit cards. Instead, the contactless card transmits all the information to the reader in order to complete the transaction.  The reader sends out electromagnetic waves that activate the card's radio-frequency chip, which in turn passes the cardholder's information to the reader.  The technology involved, often known as radio frequency identification, is used for other purposes, perhaps the best known of which is in the electronic highway toll collection systems.   

MBNA, which was acquired by Bank of America at the start of 2006, made use of its endorsement relationships with professional sports teams to get radio-frequency credit cards into the hands of customers, issuing new plastic to individuals who had signed up for football- or baseball-themed cards.  Beginning in 2004, the Philadelphia Eagles became the first team to employ the technology at Lincoln Field.

In spite of the high-profile partnerships, the credit cards are only slowly gaining acceptance, with Bank of America noting that the bank has just "a couple hundred thousand" of the radio-frequency credit cards in circulation, a slim fraction of its total 122 million credit cards. 

Not surprisingly, credit card issuers highlight the cards' speed and convenience and downplay concerns over security.  Data supplied by Bank of America emphasizes the way contactless credit cards are said to speed things along, with the average contactless fast-food restaurant transaction taking 12.5 seconds versus 26.7 seconds for the traditional credit card swipe and 33.7 second for cash.  Meanwhile, credit card executives challenge fears that personal information transmitted via radio frequency could represent a danger to consumers.  The executives say the credit cards only transmit when held a few inches from the reader, making it tough for fraudsters to intercept data.  They add that even if the information is stolen, it is encrypted. And, they note, card issuers have made it policy that cardholders have no liability when their cards are used fraudulently.

Future payment systems
Moving even deeper into the future and beyond contactless cards, the industry sees customers one day paying at checkouts with their cellphones, i-Pods or even their thumb prints.  Regardless of the payment method, according to a company credit card executive, Bank of America and other banks would continue to carry out the same function -- authorizing charges routed through national payment networks and billing the customer's account.  The exec adds that while it has become the industry's symbol, the credit card is simply a device for making payments and may be just one of several options in the future. 

He notes that the way for credit cards to beat cash is to simply be faster or more convenient.  As with the contactless credit cards, the cellphones used to make payments were embedded with radio-frequency chips so customers could just wave their phones in front of the readers at concession stands. 

While Japanese and other Asian consumers are paying with cellphones, their U.S. counterparts are viewed as unlikely to follow suit in the near future.  And, credit card executives see "biometric" payment innovations (such as allowing consumers to pay using retina scanns or thumb prints) as even further off, not because of technological limitations but because people are slow to adapt after using their credit cards to pay the same way for 30 years.

Even so, credit card execs predict that technology will alter the way consumers pay, just as the first credit cards did decades earlier.

Updated: May 9, 2008


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