Innovations and Payment Systems

Contactless credit cards hope they catch a wave


Wave your contactless credit card to effortlessly charge your purchase. Why are retailers slow to adopt it?

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Are the days of swiping a credit card numbered?

For the second time this decade, American consumers and retailers are being invited to embrace an advanced credit-card chip technology. This one is called “contactless,” and advocates say it promises better security, faster transactions, and the potential for credit cards on keychain fobs, cellphones and other devices.

The question is: This time, will anyone listen?

The industry hopes so; it has a lot at stake. Early studies say consumers spend more with the new contactless gadgets, which just require a wave of the hand past a reading device, and if that proves true, it’s good for retailers and the huge transaction processors, such as Visa and MasterCard. Manufactures of the newfangled readers required for their use will make a pretty penny, too, if retailers adopt the new technology.

“America is one of the leading lights for contactless payments,” says Jonathan Collins, senior analyst for RFID (radio-frequency identification) and contactless at ABI Research. While others already excel in contactless cards for transportation, he expects the U.S. market for contactless credit cards to grow substantially in the next few years.

Others aren’t so sure. Response so far has been tepid, with a company here and there dipping a toe into the contactless waters.
Celent senior analyst Red Gillen says that it’s not so much a matter of issuing cards — already about 8 percent of the 325 million cards issued in the United States have the chip — but of retailers accepting them. About 45,000 places accept the cards, he says.

That sounds impressive, but it’s only 0.7 percent of the market. “The trick,” Gillen says, “isn’t necessarily the issuance of the contactless chip cards, rather it’s the signing up of merchants to install the devices to accept the contactless cards,” Gillen says.
The last time the card issuers offered a Wonderful! New! Technology! in the United States, it landed with a thud.

Cards with a tiny computer chip, which holds much more information than the traditional black magnetic stripe, have been adopted elsewhere, but not the U.S. The first generation of chip cards, also known as “smart cards,” was introduced in Europe back in 1990 and required contact with the reader. Today, the U.K. almost universally uses “chip and pin” readers into which consumers insert their cards and type their passwords. But in the States, chip cards have seen big promises and many experiments, but little actual use.

American Express tried chip payments with its Blue cards, and even offered users a special at-home card reader for more secure online shopping. Some dreamed of readers on every keyboard, or chips that gave shoppers coupons. But chip cards are useless unless there’s an infrastructure to support it. Consumers and retailers each waited for the other to be the first to adopt.

Small and speedy
Everything is different with this new card chip, which works without contact through RFID. Millions have already signed on to chip cards that still carry the old-fashioned magnetic stripe, so they can be used like a regular card, too. The most obvious benefit for the user is speed. Consumers can merely wave or tap on a special reader for most purchases of up to $25. And the RFID chip can transmit a lot more information (say, your available credit) without having to dial in to a network. American Express says its ExpressPay transactions are 63 percent faster than using cash.

But the triumph is not in shaving several seconds from your own transaction, rather it is in cutting down on the dreary minutes you waste waiting for everyone else. “It’s not just you in the queue who’s using it — it’s the guy in front of you,” says Collins. “That’s the transaction you really care about. Queues put everyone off.”

In the United States, we’ve had many RFID-enhanced devices, experiments, and roll-outs. Mobil first introduced a SpeedPass in 1997 and now has more than 6 million users. MasterCard has about 14 million PayPass cards worldwide and has put readers in Coke machines and at ballparks. MasterCard has also tested readers in the self-serve lane of the Ohio Turnpike. Discover has tested and is prepared for the technology but hasn’t jumped in yet. “We’ve sat back and looked at what the market is doing,” says spokeswoman Leslie Beyer.

No matter which contactless card you have, you can use it at participating McDonald’s, United Artists Theatre or Petco locations — to name a few of the big chains that have signed on to the program. Indeed, small purchases are what the cards are all about. MasterCard has found that about three-fourths of purchases fall into this under $25 range, and nearly half (45 percent) are under $10. The company has also found that once people get a chip, they use their card 18 percent more.

For credit card issuers, the small purchases sped up by RFID-powered transactions represent one of the last frontiers of card usage. A report by ABA/Dove Consulting found that customers used debit and credit cards in 56 percent of transactions in 2005, up from 43 percent in 1999. The idea is that you will use your card instead of carrying cash in your pocket.

Safety test
Issuers say that the RFID technology is much safer, and it is true that these chips are harder to counterfeit. But some consumers worry that a thief could grab information off any nearby card. In 2004, Johns Hopkins researchers actually showed that they could skim RFID credit card info, but Collins says many improvements have since been made.

Chip cards also offer an improvement on the three-digit security code on the back of regular credit cards. The chips can produce a unique security code for each transaction. That way, even if someone skims the card information, he will still lack the new security code for a new transaction. Consumers won’t be aware of any of this but could benefit: Imagine if your credit card’s security code was constantly changing.

Card issuers, who would be on the hook for most fraud, have come up with less high-tech solutions, too. The key chain fob that you can get with the American Express ExpressPay card has a limit of $150 a day. SpeedPass now requires users to enter their ZIP codes.

Cardless future?
The other big promise RFID cards hold is enabling more special devices with credit card info, so consumers don’t have to carry around an actual card. The chips are already issued in key fobs (like SpeedPass) and watches, but the ultimate dream is to be able to make credit card transactions from a cell phone. Phones would use RFID chips but also require cooperation between issuers and phone carriers, incorporate more complicated programs, and use NFC (near field communications).
In the United States, consumers have been promised mobile phones with NFC in the same way they have bee

n tempted with monorails. Wells Fargo started a service in 2001 but shut it down after only 2,500 people signed up. Motorola started talking up its M-Wallet last year. This spring, Nokia announced that it would start selling Nokia 6131 NFC sometime this year. So far, it’s available for partners, such as banks, to offer to their customers, but there’s not yet a program for consumers to try on their own
In Japan, where carrier NTT DoCoMo launched an electronic wallet service called FeliCa in 2004, 25 million users can now use their cell phones as credit cards there. They’re also able to use them as transportation tickets and hotel room keys. NTT DoCoMo expects users of FeliCa to double by early 2009.

Gillen doesn’t think the chip cards offer enough benefit themselves to get everyone on board with chip payments. He sees cell phones as the application that will finally convert consumers. “Contactless adoption in the United States will be largely driven by the incorporation of contactless payment technology with mobile phones,” he says. “With the use of contactless within mobile phones, new benefits can be derived that make contactless very attractive.”



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