Innovations and Payment Systems

Contactless credit cards ‘floundering’


Contactless credit card technology is supposed to be the wave of the future. So far, according to experts, few seem to care.

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A decade ago, smart cards were going to become the way we all paid for things, with embedded chips replacing the familiar magnetic stripe. It flopped: Merchants saw no need to pay for upgraded card readers since consumers were content with their “dumb” cards.

Contactless cell phone and reader

Contactless payment technology


Why it’s important: It’s touted as the replacement for credit cards, offering speedier payments for consumers — who, merchants hope, will spend more when they tap and go.

What’s new: The devices haven’t caught on yet, and researchers say they’re in danger of flopping — just as “smart cards” have.

Who is impacted: Potentially everyone with a credit card, card issuers, merchants and the telecommunications industry.

Fast forward to today. Now, another highly touted “wave of the future” is at hand — contactless technology, in which consumers pay for items with the tap of a card, key fob or even a mobile device. It, too, is in danger of flopping, says a new research report.

The card industry is eagerly anticipating that consumers will move to contactless payments with mobile handsets, and this time, says the report from Javelin Research & Strategy, consumers are ready to switch: “Place the product in consumers’ hands, and although they express some concerns, they will use it.”

But contactless technology is “floundering,” the report concludes, because the case hasn’t been made to merchants or to wireless carriers that the switch is worth the cost.

There are about 25 million of the devices now, in key fobs or cards that use very short-range radio to communicate with a card reader. If mobile devices enabled with contactless abilities take off, that number could quickly rise to 57 million by 2013 if merchants and carriers can be persuaded to embrace the technology, Javelin predicts. Without it, growth will be flat, according to the report.

The move to contactless is important to the card industry as an interim step to the real future it is hoping for — one that involves, ironically, the end of the credit card itself.

“There is widespread agreement that tap-and-go contactless payments will pave the way for the day when cell phones and other devices will become the consumer’s ‘electronic wallet,’ packed with all their credit cards, merchant cards, coupon offers and more,” the report concludes.

“Contactless technology has the backing of the major card networks as the de facto next level of payment technology, with the primary goal being the migration from mag stripe cards to devices that can store multiple payment products — specifically mobile handsets. With this end-goal in mind, contactless adoption is floundering.”

Rushing the process
Other researchers agree that adoption has been slow, and that even if consumers are willing to give contactless devices a try, there’s no clamor for them. Gartner Industry Advisory Services did its own studies in 2005 and 2007 to measure consumer interest in contactless payments, both with cards and mobile devices. Interest flatlined. “It is very slow progress — people are still not naturally interested,” says Christopher Uzreau, Gartner research director of banking and investment. Changing consumer payment habits is “highly challenging,” he says.

“Expecting them to move to integrated contactless mobile phone payment solutions in a rapid fashion is unrealistic,” he says. The process must be gradual. “It could at first be a marketing tool used to distribute coupons, then it can be used to initiate payments in online communities.” Only after that comes using the devices for credit or debit payments.

“The problem we have here is we keep being told by manufacturers and mobile companies that consumers are doing more and more with mobile technology, have more sophisticated handsets, and that’s the reason they should be interested in contactless. But most of us are card-centric. We have to be careful here — how can mobile payments help what is already there? Can it fix existing problems? If it doesn’t add any value, why should consumers get used to a new payment instrument?” Uzreau says mobile contactless payments must have the goal of being complementary to what we already have rather than be a replacement.

The state of contactless, here and abroad
As of now, 400,000 contactless terminals are available at 80,000 merchant locations. While this may sound like a lot, it is only 1 percent of all merchant locations in the United States. Many of the cards are single-use cards, such as those issued to serve riders on the Bay Area Rapid Transit system in the San Francisco region.

In other countries such as Korea, contactless payment systems are already prevalent, mainly because they incorporate mobile technology. Users tap their contactless-enabled phones against contactless readers, and money is transferred instantly.

According to Jim Van Dyke, president of Javelin, there is good reason why America hasn’t yet blended contactless payments and mobile devices: Other countries have much more advanced telecommunications industries. “The U.S. telecom structure is light-years behind them,” Van Dyke says. “They don’t let telecommunication companies dictate which phones can work on which plans like we have. We’re backward when it comes to telco standards.”

Uzreau says some people justify introducing contactless into the United States because it is so popular in countries such as Japan, but that’s not the case. Uzreau lives in Hong Kong, and says while many residents there like using contactless mobile payments for public transportation and some small-value purchases such as newspapers, they are still very cash-centric. “It’s actually not very popular in Hong Kong yet — we don’t change customer spending habits just like that. What they’re doing now is focusing on younger customers, upping marketing and promoting activities and sending coupons. I think this is important to mention because there is too much hype, and the Japanese market is no proof it will work in the United States.”

Uzreau says contactless payments are successful in some markets and are starting to take shape in London and Singapore, though bringing it to the United States is a challenge. He says it could be great for hustling, bustling cities like Los Angeles or New York City, but will be irrelevant for other cities. “It doesn’t mean there is no way — it just means we need to be much more pragmatic,” Uzreau says.

Consumer interest in mobile phone initiated payments, 2005-2007
Agreement with statement: “I would like to use a mobile phone to initiate payments from my payment card accounts.”

Consumer interest in mobile phone initiated payments, 2005 to mid-2007

Source: Gartner Banking & Investment Advisory Services panel, December 2005 and August 2007

How adoption will progress
Several credit card issuers are already exploring mobile technology. Many contactless trials are currently under way across the country and world, and several contactless products are already available in the United States, such as the MasterCard PayPass.

The report found that the immediate goal of contactless transactions should be to expand the usage of cards instead of cash, particularly for small transactions and with merchants who didn’t previously accept credit or debit cards. The argument for this is that contactless payments are faster and easier for the customer, reduce time spent waiting in line at checkout and increase the amount of transactions merchants can do. This would especially be helpful for gas stations, fast food joints and event stadiums.

They also assert that, in the short term, the growth of contactless cards will be driven by their use in gift cards and private label cards.

The perks
What’s in it for consumers? As part of Javelin’s study, it conducted a random-sample panel of 2,957 people. When asked why they would like contactless, 80 percent of respondents said speed of transactions and 73 percent said ease of use.

Perks for merchants include increased convenience for customers, faster transactions (.5 seconds), greater spending when using contactless over cash (estimated between 30 percent and 35 percent), enhanced loyalty programs and branding and increased use of merchant-friendly payments (such as gift cards and private-label cards).

Obstacles to adoption
Just as the attractions differ between consumers and merchants, so do the fears.

Javelin’s report concluded consumers’ highest concern regarding contactless technology is safety: They fear their financial information may be compromised in the wireless data transfer.

Uzreau says another issue consumers are worried about is customer service. “Consumers asked us in a study a few years ago, ‘If we have contactless mobile problems, who do I contact? The manufacturer? The wireless company? The card issuer?’ The most important discussions haven’t happened yet. A lot of work is still to be done on the consumer side.”

For merchants, it’s a “chicken or the egg” issue for them and card issuers. Merchants have no incentive to invest in contactless technology if the magnetic stripe is still the dominant payment method, and card issuers will not issue contactless cards if there are not enough merchants to accept them. Magnetic stripe cards cost 20 cents to 25 cents each to make; add a dollar for every contactless device. The report says the most versatile contactless-only device is the mobile handset, but carriers don’t see enough immediate payback to make the effort or investment worth it.

If contactless catches on, eventually, magnetic stripe cards will no longer be necessary. When can we expect them to disappear completely? “It’s a great question,” Van Dyke says. “This stuff has a long tail. It’s like trying to speculate when you might use the last check. It could be 50 years because it’s a specialized application.”

See earlier story: Yak, wave and buy: Cell phone / credit card combo touted

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